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

This preview shows page 1 - 10 out of 73 pages.

OLIGOPOLY
Image of page 1

Subscribe to view the full document.

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.
Image of page 2
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
Image of page 3

Subscribe to view the full document.

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
Image of page 4
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 .
Image of page 5

Subscribe to view the full document.

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
Image of page 6
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.
Image of page 7

Subscribe to view the full document.

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
Image of page 8
Edgeworth solution
Image of page 9

Subscribe to view the full document.

Image of page 10

{[ 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