Lecture 23 - Announcements MT 2 one week from today. Will...

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Announcements MT 2 one week from today. Will cover chapters 7-10 Wednesday will be review. Practice problems are up on BB under course docs. I updated iClicker scores (check it out if your score was not up last time) 1 of 38
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2 of 38 MONOPOLISTIC COMPETITION AND OLIGOPOLY Characteristics of Different Market Organizations
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3 of 38 OLIGOPOLY The Price-Leadership Model of Oligopoly As in the other oligopoly models, an oligopoly with a dominant price leader will produce a level of output between the output that would prevail under perfect competition and the output that a monopolist would choose in the same industry. It will also set a price between the monopoly price and the perfectly competitive price. price leadership A form of oligopoly in which one dominant firm sets prices and all the smaller firms in the industry follow its pricing policy.
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Price Leadership Model of Oligopoly If the dominant firm knows the smaller firms will follow its lead it can derive its demand curve by subtracting from total market demand the amount of demand that the smaller firms will satisfy. The price-leadership model assumes, first, that the industry is made up of one dominant firm and a number of smaller competitive firms. Second it assumes that the dominant firm maximizes profit subject to the constraint of the market demand and assumes that the dominant firm lets the smaller firms sell as much as they want at the price the leader has set. The difference between the quantity demanded in the market and the amount supplied by the smaller firms is the amount that the dominant firm will produce. 4 of 38
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Price Leadership Model of Oligopoly So basically, the price leader chooses the quantity and price as a monopolist would but uses its “residual demand” curve rather than the market demand curve. Residual demand is the demand the leader faces after all follower firms sell whatever they want to at the price chosen by the leader. 5 of 38
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6 of 38 Demand, MR for Price Leader -9 -7 -5 -3 -1 1 3 5 7 9 11 1 2 3 4 5 6 7 8 9 10 12 Q P MR Residual D Market Produced by price followers
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Price Leadership Oligopoly 7 of 38 Q $ MR AC MC Residual D Maximum Profit 30 $3.50 $5 Market D
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8 of 38 OLIGOPOLY The Kinked Demand Curve Model kinked demand curve model A model of oligopoly in which the demand curve facing each individual firm has a “kink” in it. The kink results from the assumption that competitor firms will follow if a single firm cuts price but will not follow if a single firm raises price.
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9 of 38 OLIGOPOLY A Kinked Demand Curve Oligopoly Model
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10 of 38 OLIGOPOLY The Cournot Model The Cournot model of oligopoly results in a quantity of output
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This note was uploaded on 06/21/2009 for the course ECON 2005 taught by Professor Zirkle during the Fall '07 term at Virginia Tech.

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Lecture 23 - Announcements MT 2 one week from today. Will...

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