ch10 - Chapter 10 Oligopolistic Price Competition Learning...

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59 Chapter 10: Oligopolistic Price Competition Learning Objectives Students should learn to: 1. Understand the logic behind the Bertrand model of price competition, the idea of discontinuous reaction functions, how to solve a simple Bertrand duopoly model, and the fundamental differences between Bertrand and Cournot models. 2. See some of the shortcomings of the simple Bertrand model and how these can be addressed in a simple but compelling fashion. 3. Analyze how capacity constraints modify and enrich the Bertrand model 4. Analyze the application of the Bertrand competition to the simple location model when there are two firms in the model 5. Differentiate strategic substitutes and strategic complements. 6. Understand that assumptions about the nature of product differentiation have implications for the impact of changes in the market environment, as well as recognize the possibility of sometimes testing such assumptions. Suggested Lecture Outline: Spend two fifty-minute long lectures on this chapter. Lecture 1: 1. The Bertrand Model 2. Numerical problems on the Bertrand model 3. Bertrand model with capacity constraints and/or non-identical firms Lecture 2: 1. Applications of Bertrand competition to location models 2. Numerical problems / examples 3. Strategic substitutes / complements Suggestions for the Instructor: 1. Some examples for the capacity constraint case include restaurants, dentists, feed companies, car dealerships in the short run, and power plants. 2. As with the Cournot case it may be useful to carry along a numerical example for the Bertrand model. 3. Stress that the solution in the extended Bertrand model is just another case of the use of response functions to find a Nash equilibrium. 4. Spend lots of time to go over the location model Solutions to the End of the Chapter Problems: Problem 1 (a) At equilibrium 10 2 1 * * p p , assuming that if both firms charge the same price, then the firms split the market evenly.

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