20 Inperfect Competition 1

20 Inperfect Competition 1 - Topic 9 Competition between...

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4/7/2009 1 Topic 9: Competition between firms (1) USC Marshal Bertrand and Cournot competition Introduction • Many markets are best characterized as oligopolistic markets – markets with a few large producers – Cars, computers, home electronics,… • In such markets, the firms need to worry about the USC Marshal strategic interaction among themselves – Use game theory and Nash equilibrium to analyze the equilibrium in such markets Introduction • Models of imperfect competition: Bertrand competition • Pricing choice with homogeneous products Cournot competition • Choice of capacity/output with homogeneous USC Marshal products Competition with differentiated products • Pricing choice with differentiated products • Various models of product differentiation
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4/7/2009 2 Bertrand competition Bertrand competition: – Firms choose their price, produce a homogeneous product – Consider two firms (duopoly) producing steel – Marginal cost of a ton of steel is $2 USC Marshal – The total demand for steel is Q = 15-2min(P 1 ,P 2 ) • The firm with the lower price captures the whole market while the other firm sells nothing –What price/output would the firms choose if they could choose it cooperatively? –What price do the firms end up choosing when choosing non-cooperatively? Bertrand competition Cooperative outcome: – Firms choose a price that maximizes overall profits: P max P 2  15 2 P 15 2 P 2 P 2 0 P 4 3 4 USC Marshal – This price leads to an overall demand of Q=5.5 – To split the profits, each firm will produce 2.25 units of output Bertrand competition Non-cooperative outcome: – Each firm chooses their price to maximize their individual profits – In equilibrium, each firm ends up charging P=2, making zero profit USC Marshal – Key: the product is homogeneous, which means that the customers care only about the price and thus will buy only from the firm offering the lower price • Each firm has an incentive to undercut the other to gain a bigger market share until all profits are competed away
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This note was uploaded on 04/19/2009 for the course BUAD 351 taught by Professor Eastin during the Spring '07 term at USC.

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20 Inperfect Competition 1 - Topic 9 Competition between...

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