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Econ 4010 Lecture 25

Econ 4010 Lecture 25 - 12 Oligopoly Def...

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<Lecture 25> 12. Oligopoly Def.) Oligopoly is a market structure characterized by a small number of relatively large firms, producing either identical products or products with slight differences, with restricted entry and exit, and limitations on information. When we study a market, we usually want to determine the price and quantity that will prevail in equilibrium. In competitive market and monopoly, each firm could take price or market demand as given and largely ignore its competitors. In an oligopolistic market, however, each firm must carefully consider how its actions will affect its rivals, and how its rivals are likely to react. Duopoly: Market in which two firms compete with each other. Cournot Model - Each firm must decide how much to produce, and the two firms make their decisions at the same time. - Each firm's output decision depends on how much it thinks that its competitor will produce. - Each firm treats the output level of its competitor as fixed when deciding how much to produce. - The market price will depend on the total output of both firms. Output Decision (p.443) If Firm 1 thinks that Firm 2 will produce nothing, its demand curve (D 1 ) is the market demand curve. Firm 1's profit-maximizing output is 50 units, the point where MR intersects MC. If Firm 1 thinks that Firm 2 will produce 50 units, its demand curve (D 1 ) is shifted to the left.
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