8 Oligopoly - Luiscabral.net

Give an example of an industry dominated by a couple of firms where profits are significant.
Explain why the predictions of the Bertrand model are not borne out.
8.2. Bertrand and zero profits. According to Bertrand’s theory, price competition
drives firms’ profits down to zero even if there are only two competitors in the market.
Why don’t we observe this in practice very often?
8.3. E-commerce. E-commerce represents an increasing fraction of economic transactions
in many different industries. Does e-commerce create a Bertrand trap? What is
special about e-commerce (and, more generally, the new economy) that makes the Bertrand
trap a dangerous trap? How can e-commerce firms avoid the trap?
8.4. Price discrimination. A monopolist is generally better off by price-discriminating.
What about a duopolist? Consider the special case when Market A is Firm 1’s “strong”
market, whereas market B is firm 2’s “strong” market.
8.5. Cournot model assumptions. Three criticisms are frequently raised against the
use of the Cournot oligopoly model: (i) firms normally choose prices, not quantities; (ii)
firms don’t normally take their decisions simultaneously; (iii) firms are frequently ignorant
of their rivals’ costs; in fact, they do not use the notion of Nash equilibrium when making
their strategic decisions. How would you respond to these criticisms? (Hint: in addition to
this chapter, you may want to refer to Chapter 7.)
8.6. Cournot vs. Bertrand. Which model (Cournot, Bertrand) would you think provides
a better approximation to each of the following industries: oil refining, internet access,
insurance. Why?
8.7. ByeByeCold. You are currently the sole seller of ByeByeCold, a revolutionary drug
that almost instantly eliminates cold symptoms. Although the production cost is only $.10
per dose, you sell ByeByeCold for $1.39 per dose, for a total profit of $900m a year. You
are currently considering licensing ByeByeCold to a second producer. Neither you nor your
competitor have any significant capacity constraints. One of your managers suggested, since
the firm would be sharing the market with a competitor, it would be appropriate to charge
a flat fee that covers half the current profits plus a generous margin; the value of $700m was
suggested. An alternative proposal would be to set a royalty fee of $.50 per dose. What is
your opinion?
8.8. French generics manufacturer. Consider the last problem in Section 8.4. Suppose
that a retailing campaign costing e 80m is expected to increase demand by 40%. Suppose
also that the current rupee/euro exchange rate is 50 INR/e. Should the French firm go
ahead with the campaign? One macroeconomics expert tells you that “it is likely that the
rupee will appreciate in the near future.” How would this influence your decision?
8.9. Karmania automobiles. There are two auto producers in Karmania, F1 and F2.