Lecture10 - Lecture 10 Tacit Collusion Profits in...

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1 Lecture 10: Tacit Collusion Profits in Oligopolistic Markets • Recap of Standard Models of Oligopolistic Competition. – Bertrand – Cournot – Differentiated Products • Tacit (Implicit) Collusion – In theory – How it can be achieved in practice…. • GE/Westinghouse example
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2 Recap - I • Point of comparison is monopoly price P M and monopoly profits M . • Homogeneous Product Bertrand Model - “Price competition” – In practice: situation where capacity constraints are not important – it is easy for an individual firm to cut price and satisfy demand of the whole market. – This makes “undercutting” extremely tempting, in the extreme case driving prices down to marginal costs. – P M > P B = MC M > 1 + 2 + 3 +…= Industry profits B – if marginal costs are constant, all profits = 0 Recap - II Homogenous Product Cournot Model - “Quantity competition” – In practice: situation where capacity constraints are important – hard for individual firms to cut price and flood the market. Not as much downward pressure on prices as in Bertrand model. – Results: – P M > P C > P B =MC M > Total Industry Profits C > 0 – P C and Total Industry Profits C are lower the more firms there are in the market.
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3 Recap - III • Differentiated Products – Products differ by their characteristics – Now even without capacity constraints, differentiation makes undercutting less tempting. This allows prices to stay higher than in the homogenous product Bertrand or Cournot models. – P M > P D > P B =MC M > Total Industry Profits D > 0 – Prices and Total Industry Profits D are higher the more differentiated the products are. Recap - IV • Summary: – In all these oligopoly situations, one makes less profits than one would in a monopoly. – Two reasons: split the pie, decreased size of pie – How much lower profits are than the monopoly profits depends on the particulars of the situation (capacity constraints, differentiation, etc.)
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