How to get reaction function?
1.) Find inverse demand curve
2.) plugin q as the sum of the output of 2 producers
3.) Find profit function using the obtained equation from (2)
4.) Get the marginal profit then equate to zero to solve for the reaction function as a function of the quantity sold by the other firm
How to solve for cornout equilibrium?
Equate each reaction function with their quantity then solve simultaneously
What happens when there is a Stackleberg equilibrium?
Someone is the leader which sets MR=MC while the folllower uses their reaction function
How to solve for one big firm and many small firm situation?
1.) The demand curve the big firm faces is the demand curve less the quantity supplied by the competitive firms
2.) Obtain inverse demand curve then revenue function then marginal revenue
3.) Set MR = MC
How to obtain industry supply curve
1.) get individual supply curves by P=MC and isolate y
2.) Multiply the number of firms
What is an Oligopoly?
A market structure with a small number of firms, each possessing significant market power and strategic interdependence.
What is a Duopoly?
An oligopoly with exactly two firms.
What is the defining characteristic of oligopolistic markets?
Strategic Interdependence: Each firm’s decisions (price, quantity) directly affect the profits and decisions of its rivals.
What are the two main dimensions for classifying oligopoly models?
- Timing of Moves: Sequential vs. Simultaneous.
- Choice Variable: Quantity vs. Price.
What is the Stackelberg Model?
A sequential quantity competition model where one firm (the leader) chooses output first, and the other firm (the follower) observes and then chooses its output.
What is a Reaction Function (or Best-Response Function)?
A function showing a firm’s profit-maximizing output as a function of its rival’s output (e.g., y2=f2(y1)y2=f2(y1)).
How does the Stackelberg leader make its decision?
It incorporates the follower’s reaction function into its own profit maximization problem, essentially choosing the point on the follower’s reaction curve that maximizes its own profit.
Compared to a Cournot duopoly, what is the Stackelberg outcome?
The leader produces more and the follower produces less than they would in a Cournot equilibrium. Total output is higher than in Cournot but lower than in perfect competition.
What is the Price Leadership model?
A sequential model where a dominant firm (leader) sets the price, and competitive fringe firms (followers) take that price as given and supply accordingly (S(p)S(p)).
What demand does the price leader face?
Residual Demand: R(p)=D(p)−S(p)R(p)=D(p)−S(p), where D(p)D(p) is market demand and S(p)S(p) is the fringe supply at price pp.
What is the Cournot Model?
A simultaneous quantity competition model where firms choose their outputs at the same time, each taking the other’s output as fixed when making its decision.
What is a Cournot-Nash Equilibrium?
The set of outputs where each firm’s output is a best response to the other firm’s output (the intersection of the firms’ reaction curves).
What is the Bertrand Model?
A simultaneous price competition model where firms choose their prices at the same time.
What is the “Bertrand Paradox”?
With identical products and constant marginal costs, the only Nash equilibrium is for both firms to set price equal to marginal cost (P=MCP=MC), resulting in zero economic profit—the same outcome as perfect competition.
Why does the Bertrand Paradox occur?
Any firm charging above MCMC can be undercut by its rival, capturing the entire market. This incentive drives prices down to MCMC.
What is a Cartel?
A group of firms that collude to act as a single monopolist, restricting total output to maximize joint profits.
What is the optimal output rule for a cartel?
Produce where Market Marginal Revenue (MR) equals the Marginal Cost (MC) of each member firm, and allocate output so that all members have equal MC.
Why are cartels inherently unstable?
Each member has a strong incentive to cheat (produce more than its quota) because, at the cartel output, the firm’s individual MRMR (the market price) is greater than its own MCMC.
What is a common strategy to enforce collusion?
Trigger Strategies: Firms agree to collude, but if any firm cheats, the others punish it by reverting to a non-cooperative equilibrium (e.g., Cournot output) forever after.
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Lesson 221
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Lesson 333
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Lesson 418
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Lesson 525
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Lesson 622
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Lesson 719
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Lesson 814
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Lesson 915
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Formulas18
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Market Equilibrium27
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Technology26
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Profit Maximization28
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Cost Minimization64
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Cost Curves17
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Firm supply24
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Industry Supply26
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General Equilibrium51
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Monopoly and Monopsony42
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Oligopoly32
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Externalities5
