Lecture%2024%20Oligopoly

Lecture%2024%20Oligopoly - Oligopoly Economics 401 Modeling...

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1 Oligopoly Economics 401 Modeling Oligopoly as a Game ± players = firms ± strategies = output, price, investment, advertising decisions ± pay-offs = profits The Cournot Model (Augustine Cournot; French Economist (1838)) ± Strategies: Output decisions Oligopolist is like Monopolist along residual demand MC a q(a) p(q(a)+a) Market Demand: p(q+0) (If others produce nothing) q m p m “Residual Demand” p(q+a) q p ± Firms independently and simultaneously set outputs. Then price clears the market ± The strategic problem for the firm: Produce output to maximize profits given what it thinks others will produce
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2 “Best Response Function” For any level of q 2 , what is Firm 1’s optimal production? ± What combinations (q 1 , q 2 ) would give the same profit? q 1 q 2 0 ± To left and up profits strictly decrease Profits Strictly Fal Profits Strictly Fal q m Profits Strictly Rise ± To right, profits strictly increase ± Suppose q 1 < q m at 0 production of others “Best Response Function” For any level of q 2 , what is Firm 1’s optimal production? q
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Lecture%2024%20Oligopoly - Oligopoly Economics 401 Modeling...

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