CHAPTER 14
TRADITIONAL MODELS OF IMPERFECT COMPETITION
The problems in this chapter are of two types: analytical and essay. The analytical problems look
at a few special cases of imperfectly competitive markets for which tractable results can be
derived. Some of these results (especially those in Problems 14.4, 14.5, and 14.6) are quite
important in the industrial organization literature. The essay problems in the chapter (14.3 and
14.8) do not offer such definitive results but instead ask students to think a bit more broadly
about some institutional issues in industrial organizations.
Comments on Problems
14.1
This is a simple duopoly problem that duplicates Example 14.1 with different numbers.
14.2
A problem providing numerical solutions for monopoly and Cournot equilibria for the
simple linear demand curve and constant marginal cost case. The problem shows that in
this case the competitive solution (
P
= 5) is the limit of the Cournot outcomes as the
number of firms approaches infinity.
14.3
An essaytype question that seeks to explore some purported empirical observations in
various markets.
14.4
A problem that shows the derivation of the “DorfmanSteiner” conditions for optimal
spending on advertising.
14.5
The problem shows that the widelyused Herfindahl Index is correlated with industry
profitability, if the firms in industry follow Cournot pricing strategies.
14.6
A problem based on Salop’s “circular” model of demand. This is a very useful model
both for spatial applications and for looking at issues in product differentiation.
14.7
This problem provides a numerical example of price leadership. Construction of the net
demand curve provides a good illustration of the assumptions behind the behavior of the
“competitive fringe.”
14.8
An essay question about monopoly and innovation. The question is a very complex one
in reality though the solutions provide Fellner’s suggested simple answer to the problem.
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 Spring '09
 Smith
 Economics, Perfect Competition, Chapter 14/Traditional Models

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