3Competition - 3S03 INDUSTRIAL ORGANIZATION Instructor...

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3S03: INDUSTRIAL ORGANIZATION Instructor: Laura Grigolon [email protected] Office hours: Friday 10.00-11.00 AM 1
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Competition 2
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Five central assumptions 1. homogenous product relaxed product differentiation (Hotelling) 2. perfect information relaxed in search models (Diamond, Stahl) or Akerlof’s model of lemons 3. free entry relaxed in vertical foreclosure or networks (not in this course) 4. price taking relaxed in oligopoly models where price is determined by the firm, not by the market 5. no externalities relaxed in models in which externalities (pollution) are produced by firms and regulated 3
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Five central assumptions The following markets are not likely to be characterized by perfect competition. In each case, give the most likely reasons why. 1. (i) used cars 2. (ii) diamonds 3. (iii) motion pictures 4
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Five central assumptions The following markets are not likely to be characterized by perfect competition. In each case, give the most likely reasons why. 1. (i) used cars: asymmetric information + heterogeneous goods 2. (ii) diamonds: concentration, paucity of diamond mines -> high entry barriers 3. (iii) motion pictures: heterogeneity + imperfect information (experience good) 5
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Behavior of competitive firms Firm objective: profit max Demand for each individual firm is horizontal (price taker) MC q q p p q C q q p q = = + 0 F.O.C. ) ( ) ( max 6
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Profits q AC MC $ p 0 q 0 PROFITS 7
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