unit five -oligopoly (final).ppt

# unit five -oligopoly (final).ppt - OLIGOPOLY Learning...

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OLIGOPOLY

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Learning outcomes By the end of this chapter and having completed the Essential reading and activities, you should be able to: describe and derive the Bertrand paradox analyse how the introduction of capacity constraints in the Bertrand model leads to equilibrium outcomes with price greater than marginal cost and positive profits explain the theoretical foundations of the Cournot model analyse the Cournot model for various assumptions regarding the demand, the number of firms, and the cost structures.
WHAT IS OLIGOPOLY? Another market type that stands between perfect competition and monopoly. Oligopoly is a market type in which (characteristics): A small number of firms compete/ sellers. Interdependence of decision making Barriers to entry Product may be homogeneous or there may be product differentiation Indeterminate price and output

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Oligopoly Models OLIGOPOLIST MODELS 1.Non collusive model Cournot model Edgeworth model Bertrand model Stackelberg model Sweezy’s model 2.Collusive Model Cartels Low cost price leader Market dominant price leader Barometric price leader
The Bertrand paradox Assume goods are identical they are perfect substitutes Consumers buy from the producers who charge lower price Each firm faces a demand curve equal to half the market demand at common price The market demand is q=D(P) The marginal cost is c per unit of production The Nash equilibrium outcome of this game is p 1* = p 2* = c . In other words, firms price at marginal cost and make zero profit .

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Bertrand paradox The proof consists in distinguishing cases and showing that in all of them except the case p1 = p2 = c there exists a profitable deviation by at least one firm. In particular: ••pi > pj > c : this cannot be a Nash equilibrium (NE) because firm i will want to reduce its price slightly below pj , capture the whole market and make a positive profit rather than zero ••pi = pj > c : this cannot be a NE because either firm will want to reduce its price slightly and almost double its profit by serving the whole market
Bertrand paradox ••pi > pj = c : this cannot be a NE because firm j will want to increase its price slightly, maintain the whole market and make positive profit rather zero ••pi < c and/or pj < c : this cannot be a NE because one or both firms will want to set price equal to c and stop making losses ••pi = pj = c : yes, this is a Nash equilibrium as none of the firms can increase its profit by deviating – if a firm increases its price it still makes zero profit, if it reduces its price it makes a loss and this is worse than zero profit.

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Bertrand paradox This is called a bertrand paradox because firms in industries with few numbers never succeed in manipulating the market price to make profits In the case where cost are different (c1<c2) Both firms charge c2 Firm 1 makes a profit of (cc1-c2)D(p), while firm 2 makes no profit
Edgeworth solution

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