Ch.13&14 Notes

# Ch.13&14 Notes - Intermediate microeconomics Professor...

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Intermediate microeconomics Professor Yongmin Chen Topic 9. Market Structure and Competition Markets differ in two important dimensions: the number of sellers and the nature of product differentiation. With many firms producing a homogeneous product, we have a perfectly competitive market. With a single firm, the market becomes a monopoly. Between these two extremes are markets with a small number of firms (oligopoly), markets with a dominant firm, and markets with many differentiated-products producers (monopolistic competition). Oligopoly with homogeneous products The Cournot model is the classical model to study a market with a small number of firms competing in a homogeneous-product market. Suppose that two firms, named A and B, are competing in choosing quantities. Suppose the market demand curve is Q = 100 - p, and each firm's marginal cost is 1. Each firm takes the other firm's output as given, and chooses its own output to maximize its profit. What is the equilibrium in this game? Suppose A's output is q, and B's output is g, then market price would be 100 - (q+g). A's total revenue, when it produces q, given B is producing g, is R A = q[100-(q+g)]. A's marginal revenue is MR A = 100 - g - 2q To be optimal for A, given B's output, A chooses its output so that marginal revenue equals marginal cost: 100 - g - 2q = 1. Thus, A's optimal output is a function of B's output, and is given by q(g) = (99 - g)/2 This function is called A's reaction function. Its curve is called the reaction curve. Now firm B should set its output in a similar way.

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## This note was uploaded on 03/31/2008 for the course ECON 3070 taught by Professor Loh,joyce during the Spring '07 term at Colorado.

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Ch.13&14 Notes - Intermediate microeconomics Professor...

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