LEC8_PG_EXT_2019.pdf - Announcements \u2022 Problem set 2 posted today Due Feb 26 \u2022 Lecture notes on the models we have been discussing posted in the

LEC8_PG_EXT_2019.pdf - Announcements • Problem set 2...

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Announcements Problem set 2 posted today. Due Feb 26. Lecture notes on the models we have been discussing posted in the lecture slides folder. Lecture notes for today also posted.
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Bertrand competition in differentiated product markets In homogeneous goods markets, Bertrand price competition leads to perfectly competitive outcome, even with two firms ! Bertrand price competition with differentiated products leads to a different outcome. (why?) In the simplest model, we take non-price attributes as given and look for a Nash equilibrium associated with a given demand and cost structure.
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Demand for differentiated products?
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Firm’s profit maximization problem? 2 firms, producing imperfect substitutes. Firms’ demand curves are: q 1 = a − b 1 p 1 + b 2 p 2 q 2 = a − b 1 p 2 + b 2 p 1 Assume: b 1 > b 2 (so demand more responsive to own-price) Firms’ costs are C(q) = cq Firm 1 maximizes
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Solve for the “best response function”
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Nash equilibrium (graph)
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Applied example: Automobile industry
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Use this framework to model how vehicle manufacturers strategically set prices….
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Once you’ve estimated this model?
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Corporate Average Fuel-Economy (CAFE) standards A large literature models firm response to an important policy
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Corporate Average Fuel-Economy (CAFE) standards Average Fuel Economy
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Why bother with regulating fuel economy?
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We aren’t the only country with fuel economy standards
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Target is in terms of sales-weighted harmonic mean of miles per gallon (MPG): q " + q $ + q % + q & q " mpg " + q $ mpg $ + q % mpg % + q & mpg & Inefficient cars get more weight because we care about emission per mile This is the same as as the inverse of the sales- weighted arithmetic mean of fuel consumption rates (gallons per mile) Fuel economy standards tend to be sales-weighted
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Obama CAFE standard reform
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Changes: Increase in stringency Banking (5 years) and borrowing (3 years) Trading across models and companies Features: Separate car vs truck Footprint-based Credits for new tech (low HFC AC, reduced refrigerant leakage) Super-credits for EVs, hybrids, fuel cell vehicles Obama CAFE reform
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Each size vehicle has a new standard In 2016: car (40 ft 2 ) 41 MPG light truck (65 ft 2 ) 24 MPG Composition of sales determines actual MPG Footprint is wheelbase multiplied by average track width Different footprint curves for cars vs light trucks Why design a policy like this? Efficiency implications? Footprint based standard??
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Homework assignment Review a reader-friendly review of the CAFÉ literature (Kleir and Linn, 2011). Work with a stylized Bertrand model to derive first order conditions for profit maximization (holding non-price attributes constant) How do the authors modify the standard Bertrand model to incorporate the CAFÉ constraint?
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  • Spring '16
  • Meredith Fowlie
  • Economics, Externality, Benny, Coase

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