4. Oligopoly

b. explain relationships between price, marginal revenue, marginal cost, economic profit, and the elasticity of demand under each market structure;

## c. describe a firm’s supply function under each market structure; ## d. describe and determine the optimal price and output for firms under each market structure; ## e. explain factors affecting long-run equilibrium under each market structure;

What two characteristics form an oligopoly? 1. A small number of rival firms 2. High barriers of entry into the market (either natural or legal)

What are the three basic pricing strategies for oligopolists? 1. Pricing interdependence - firms will match a price reduction and ignore a price increase 2. The Cournot model - firms determine their output to maximize profits without considering what the other competitors will do 3. Nash equilibrium - when a firm does what is best for itself after taking into account the other firm’s actions.

Why do ologopolists have a strong incentive to collude? If they compete, prices are driven down and they will barely cover their per-unit cost. If they collude they can raise prices and restrict output.

What is a dominant firm model and how does it affect pricing in an oligopoly? A dominant firm model is where the market consists of a dominant firm and some fringe firms. The dominant firm becomes the price maker. It operates as a monopoly, faces a residual demand curve, and chooses price and output to maximize its profit (MR = MC). Other firms are price takers or followers.