Is a cartel a Nash equilibrium?
, A cartel is an oligopoly in which the members try to collude to behave as a monopoly by setting prices and output to maximize the collective profit. , The outcome for a cartel is a prisoner’s dilemma with a Nash equilibrium with each member doing the best it can, given the behavior of the others.
What is a cartel in game theory?
Cartel members cooperate to set industry price and output. Game theory indicates that cartels are inherently unstable. Each individual member has an incentive to cheat in order to make higher profits in the short run. Cheating may lead to the collapse of a cartel.
At what point is the Cournot equilibrium achieved?
intersection point
The Cournot Equilibrium is found at the intersection point between the two reaction curves as represented in Fig. 6.12-8.
Why is Cournot equilibrium A Nash equilibrium?
The Cournot model of oligopoly assumes that rival firms produce a homogenous product, and each attempts to maximize profits by choosing how much to produce. All firms choose output (quantity) simultaneously. The resulting equilibrium is a Nash equilibrium in quantities, called a Cournot (Nash) equilibrium.
How do you find the cartel price and quantity?
Find equilibrium output and price for the cartel. B. Find each firm’s equilibrium profits….Collusion and Competition within a 2 firm industry.
| Firm A | Firm B | |
|---|---|---|
| 1. Find (P – AC)q* for each firm | (60 – 20)20 | (60 – 20)20 |
| 2. Calculate profits | pA* = $800 | pB* = $800 |
Why are cartels inherently unstable?
Cartels are inherently unstable because individual firms can earn higher profits by selling more than their allotted quota. As more firms in the cartel cheat, prices fall, defeating the agreement. The model assumes that competitors will follow price reductions but not price increases.
How is cartel profit calculated?
Find equilibrium output and price for the cartel. B. Find each firm’s equilibrium profits….Collusion and Competition within a 2 firm industry.
| Firm A | Firm B | |
|---|---|---|
| 1. Find (P – AC)q* for each firm | ((140/3) – 20)(80/3) | ((140/3) – 20)(80/3) |
| 2. Calculate profits | pA* = $711.11 | pB* = $711.11 |
Is Cournot equilibrium A Nash equilibrium?
Why is Cournot equilibrium stable?
In the context of dynamical system, a Cournot equilibrium is stable if most of the initial points near the equilibrium will converge to the equilibrium. Under the assumption of monotonic reaction functions, the dynamics of the adjustment process to the Cournot equilibrium are simple.
How did Cournot come up with the Nash equilibrium?
As noted above, this equilibrium was established by Cournot, using what became a Nash equilibrium as a result of Nash’s game-theory work many years later. The question arises as to the socially efficient levels of output that the two firms should produce and the price at which that output should be sold.
How is a Cournot equilibrium different from a collusive equilibrium?
The difference between this Cournot equilibrium and the collusive one is that each firm adjusts its output independently of the other firm’s output to maximize its profit, whereas under collusion it adjusts its output in conjunction with an agreed-upon equivalent adjustment of the other firm’s output.
What are the equilibria of Cournot’s and Bertrand’s models?
Equilibria in Cournot’s and Bertrand’s models generate different economic outcomes: • equilibrium price in Bertrand’s model is c • price associated with an equilibrium of Cournot’s model is. 1 3(α+2c), which exceeds c since α > c.
How does Cournot’s model of the market work?
Cournot’s model: firm changes its behavior if it can increase its profit by changing its output, on the assumption that the output of the other firm will not change but the price will adjust to clear the market. If prices can easily be changed, Cournot’s model may thus better capture firms’ strategic reasoning.