lecture 7

# lecture 7 - LECTURE 7 OLIGOPOLY AND ENTRY PREVENTION 1...

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1 LECTURE 7 OLIGOPOLY AND ENTRY PREVENTION

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2 What’s Oligopoly? An oligopoly is a market or an industry in which there are only a few suppliers. Types of oligopoly Duopoly: 2 firms Triopoly: 3 firms Quadrupoly: 4 firms
3 Cournot Model Cournot conjectures: each firm assumes its rivals will keep their output levels constant when it changes its own output. Cournot equilibrium for a duopoly is a pair of output levels, each for one firm, such that no firm will have an incentive to change its output unilaterally. Reaction functions or Best-response functions : best choice given its rivals’ choices.

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4 Cournot Model How to derive reaction functions? Method: residual demand curve
5 Cournot Model How to derive reaction functions? Method: residual demand curve As q 2 increases, Firm 1’s inverse residual demand declines, and thus the optimal q 1 also declines. Firm 1’s reaction function

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6 Cournot Model How to derive reaction functions? Method: residual demand curve Example : Suppose the inverse market demand is Inverse residual demand faced by Firm 1: The corresponding MR curve is: The optimal q 1 is given by MR 1 = MC 1 , then Firm 1’s reaction function is given as: Similarly, Firm 2’s reaction function is: ( 29 1 2 P A b q q = - + ( 29 2 1 P A bq bq = - - ( 29 ( 29 1 1 2 1 2 MR q A bq bq = - - ( 29 ( 29 1 1 2 1 2 2 A MC q bq q f q b - - = = ( 29 ( 29 2 2 1 2 1 2 A MC q bq q f q b - - = =
7 Cournot Model Cournot equilibrium Stable if Firm 1’s reaction function has a larger slope. Unstable if Firm 1’s reaction function has a smaller slope.

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8 Cournot Model Cournot equilibrium : Nash equilibrium of a simultaneously-move quantity-setting duopoly game. Exercises: If the firms are symmetric, which quantity is larger? Optimal q 1 given q 2 = 0, or the amount of q 2 that will make optimal q 1 = 0? What’s the intuition underlying? Is the Cournot equilibrium price above or below the monopoly price? Under which equilibrium are consumers better off? Under which equilibrium is total surplus larger?
9 Cournot Model Welfare comparison Quantity Price MR D P m P c Welfare-optimal equilibrium Monopoly equilibrium A Cournot equilibrium B

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Bertrand Model Bertrand conjectures: each firm assumes its rivals will keep their price levels constant when it changes its own price. Residual demand:
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lecture 7 - LECTURE 7 OLIGOPOLY AND ENTRY PREVENTION 1...

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