Chapter 10: OLIGOPOLY
1. Characteristics of oligopolies
2. Models of oligopolistic behavior including introduction to game theory
3. Other dimensions
Problems: 2-6
WHAT YOU SHOULD BE ABLE TO DO
1. Detrmine concentration ratios and the HHI.
2. Continue with cartel problems (from Chapter 9).
3. Find solutions for the dominant firm price leadership model.
4. Detrmine the Cournot solution.
5. Kinked Demand
6. Understand payoff matrix, dominant strategy, the Prisoner's Dilemma
EXAMPLES
1. GIM is regarded as the price leader in its industry. The industry's demand is: QD=300-P. GIM's marginal cost is: MCL=3QL. The followers' supply function is: QF=50P.
a. Determine GIM's price and output.
b. How much will the followers produce?
c. How likely is GIM to remain as price leader?
2. Two producers, A and B, with zero marginal costs face a combined market demand of Q=2000-10P.
a. Determine the price and output if they form a cartel.
b. What is the equation for firm A's reaction curve (assuming firm B maintains a constant output)?
c. How much will each produce if they both behave as Cournot duopolists? [Note: There is a correction to the answer. Instead of 'Set QA=QB', the answer should state, 'Solve for QA and QB from the two reaction equations.']
d. Determine the competitive price and quantity. [Note: There is an error in the answers. Q=2000 (not 1000).]
3. An oligopolist's price equation is P = 40 - 2Q for Q equal or smaller than 8 and P = 44 - 2.5Q for Q greater than 8.
a. Sketch the firm's demand and marginal revenue curves noting all the relevant values on the vertical axis.
b. Determine the firm's profit maximizing price and quantity if marginal cost is constant at $5.
c. By how much can marginal cost increase without prompting a price change?