cournot1

cournot1 - Oligopoly Models Static vs. dynamic models...

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ECO 171 Industrial Organization Oligopoly Models • Static vs. dynamic models • Characteristics of the markets – Homogeneous products – Differentiated products • Strategic considerations: – Decision variable role of prices vs. capacity choice • Cournot (capacity choice/quantities) • Bertrand (prices) – Timing of decisions: • Simultaneous moves • Sequential moves (Stackleberg)
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ECO 171 Industrial Organization Overview • Determination of price and market shares – Two identical firms – Many identical firms – Two firms with different costs • Key questions: – How much total output and price? – What determines the shares of firms • Key concepts: – Residual demand – Reaction functions – Cournot equilibrium
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ECO 171 Industrial Organization The Cournot Model • Start with a duopoly • Two firms making an identical product (Cournot supposed this was spring water) • Demand for this product is p=D(Q)=D(q 1 +q 2 ), where q 1 is output of firm 1 and q 2 is output of firm 2 Linear case: P = A - BQ = A - B(q 1 + q 2 ) • Marginal cost for each firm is constant at c per unit • Simultaneous choice of output.
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ECO 171 Industrial Organization Cournot model: solution • Revenue of firm 2 = D ( q 1 +q 2 ) q 2 • Note that demand depends not only on q 2 but also on q 1. It is called the residual demand form firm 2. • Each firm chooses its output given a conjecture of what the other firm will do. In equilibrium conjectures are correct. Marginal revenue for firm 2 = D ( q 1 +q 2 ) +(dp/dq)q 2 • Maximize profits by setting MR = MC=c • This gives a “best choice” q 2 given conjecture q 1 . This is called a best response or reaction function q 2 =R 2 ( q 1 ). • Likewise q 1 =R 1 ( q 2 ). • Cournot equilibrium: ( q 1 ,q 2 ) that are best responses to each other.
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ECO 171 Industrial Organization The Cournot model (cont.) P = (A - Bq 1 ) - Bq 2 $ Quantity ( q 2 ) A - Bq 1 If the output of
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This note was uploaded on 10/15/2008 for the course ECON 171 taught by Professor Hopenhayn during the Winter '07 term at UCLA.

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cournot1 - Oligopoly Models Static vs. dynamic models...

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