Econ 4010 Lecture 26

# Econ 4010 Lecture 26 - 12 Oligopoly We have...

This preview shows pages 1–2. Sign up to view the full content.

<Lecture 26> 12. Oligopoly We have assumed that our two duopolists make their output decisions at the same time. Now let's see what happens if one of the firms can set its output first. Stackelberg Model Oligopoly model in which one firm sets its output before other firms do Duopoly Example: P = 30 – Q, MC 1 = MC 2 = 0. Suppose Firm 1 sets its output first and then Firm 2, after observing Firm 1's output, makes its output decision. In setting output, Firm 1 must therefore consider how Firm 2 will react. Firm 2's Reaction Curve: Q 2 = 15 – (1/2)Q 1 What about Firm 1? Max. π 1 => 1 / dQ 1 = 0 => Q 1 = 15 Substitute for Q 2 in the demand function, P = 30 – Q 1 – Q 2 = 30 – Q 1 – [15 – (1/2)Q 1 ] = 15 – (1/2)Q 1 . TR 1 = 30Q 1 – Q 1 2 – Q 2 Q 1 = 30Q 1 – Q 1 2 – [15 – (1/2)Q 1 ]Q 1 = 15Q 1 – (1/2)Q 1 2 , MR 1 = 15 – Q 1 . Equilibrium: Q 1 = 15, Q 2 = 15 – (1/2)Q 1 = 15/2, Q = 22.5, P = 7.5 Going first fives Firm 1 an advantage. Why? Announcing first creates a fait accompli : No matter what your competitor does, your output will be large. To maximize profit, your competitor must take your large output level as given and set a low level of output for itself. If your competitor produced a large level of output, it would drive price down and you would both lose money. So unless your competitor views "getting even" as more important than making money, it would be irrational for it to produce a large amount.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 03/31/2009 for the course ECON 4010 taught by Professor Cheng during the Spring '09 term at USC.

### Page1 / 4

Econ 4010 Lecture 26 - 12 Oligopoly We have...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online