Solutions to Market structure questions
The following solutions give definitions, comparisons, contrasts, and examples based on monopoly, duopoly, the Nash equilibrium, and other concepts. Monopoly is defined and its relation to the competitive explained. Concepts of quantity competition among duopolists are also explained, and the Nash equilibrium concepts in a one-shot game are elaborated.
Defining monopoly and explaining its inefficiency in relation to a competitive market?
A monopoly is a market structure in which there is only a single seller but many buyers and sellers produce a unique product in the market. For the monopolistic firm, there is no competition in the market to face because he is the sole seller of that goods and has no substitute for that product. And the law of demand does not hold in the monopolistic market.
It is inefficient in relation to a competitive market because consumers criticize that monopolistic firms charge very high prices due to no availability of substitute product and monopolies supply their products in a limited range due to which their product’s demand is always relatively higher than their supply. Due to which the quality and price of the product in a monopolistic market always remain inefficient. But in the competitive market, there are many producers and many buyers so the price is determined by the supply and demand. And there are no barriers to entry or exit in the competitive market. Due to the availability of many homogenous goods in the competitive market, firms produce a good quality product and sell it at an affordable price to buyer.
Comparing and contrasting the non-cooperative and cooperative outcomes when duopolists are involved in quantity competition?
Duopoly is a part of an oligopoly in which two competing businesses capture the entire market area for a specific product or service they provide. For instance, Google and Facebook are a duopoly in the digital advertising sector.
When two firms start to cooperate in the duopolists market, it helps these firm to maximize their profits because there will be no competitors who will remain in the market to compete. And these firms will be free from the pressure of competition and will have little control over the price but these firms cannot fully control the price of the product. Due to cooperative behavior firm profits are maximized but the consumers are charged with a high price for their consumption.
The non-cooperative outcome in the duopolists market leads creates high competition between two firms which creates the homogenous product and they will start to produce a better product than the competitor firm and try to sell the product less price than its competitor product price. Here the producer gains less profit due to competition but the consumers maximize their utility by consuming goods at price.
Explain if the Nash equilibrium in a one-shot game has to be unique and give an example?
Basically, Nash equilibrium is an idea of a game theory in which the optimal outcome of a game is one where no player has an incentive to deviate from their select strategy after seeing an opponent’s choice. But in the dominant strategy state that the chosen strategy of a player will move to a better result out of all possible strategies that be used, rather than the strategy that the opponent player uses. The uniqueness of Nash Equilibrium is a desired property of games.
Take for example a game between John and Rose. In this game both participants can choose strategy A, to receive $2, or strategy B, to lose $2. Logically, here both participants will choose strategy A and collect $2.
If you revealed that rose’s strategy to john and vice versa, you will not move from some from initial move even knowing the other players move and this is called Nash equilibrium.