Lecture10TacitCollusion.pdf

Lecture10TacitCollusion.pdf - Motivation Tacit Collusion In...

Info icon This preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
Motivation Tacit Collusion In Practice GE & Westinghouse Economics of Entrepreneurship: Tacit Collusion University of Michigan
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Motivation Tacit Collusion In Practice GE & Westinghouse 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
Image of page 2
Motivation Tacit Collusion In Practice GE & Westinghouse Recap, I Point of comparison is monopoly price P M and monopoly profits π 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 π M > π 1 + π 2 + π 3 + ... = Industry profits B if marginal costs are constant, all profits = 0
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Motivation Tacit Collusion In Practice GE & Westinghouse 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 π M > Total Industry Profits C > 0 P C and Total Industry Profits C are lower the more firms there are in the market.
Image of page 4
Motivation Tacit Collusion In Practice GE & Westinghouse 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 π M > Total Industry Profits + D > 0 Prices and Total Industry Profits D are higher the more differentiated the products are.
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Motivation Tacit Collusion In Practice GE & Westinghouse 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.)
Image of page 6
Motivation Tacit Collusion In Practice GE & Westinghouse Question Is there anything that can raise prices and increase profits in these scenarios?
Image of page 7

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern