Lecture 11

Lecture 11 - 5/14/2007 Profits in Oligopolistic Markets...

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5/14/2007 1 Profits in Oligopolistic Markets • Recap of Standard Models of Oligopolistic Competition. – Bertrand – Cournot 5/14/2007 – Differentiated Products • Tacit (Implicit) Collusion –Intheory – How to achieve it in practice…. • GE/Westinghouse example Recap - I • Point of comparison is monopoly price P M and monopoly profits Π M . • Homogeneous Product Bertrand Model - “Price competition” 5/14/2007 competition – In practice: situation where capacity constraints are not important – it is easy for an individual firm to cut price and satisfy demand of the whole market. – “Undercutting” extremely tempting, driving prices down to marginal costs. –P M > P B = MC Π M > Π 1 + Π 2 + Π 3 +…=Industry profits B – if marginal costs are constant, all profits = 0 Recap - II • Homogenous Product Cournot Model - “Quantity competition” – In practice: situation where capacity constraints are important – hard for individual firms to cut price and fl d h k N h d d 5/14/2007 flood the market. Not as much downward pressure on prices as in Bertrand model. – Results: –P M > P C > P B =MC Π M > Industry Profits C > 0 –P C and Industry Profits C are lower the more firms there are in the market.
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2 Recap - III • Differentiated Products – Products differ by their characteristics – Now even without capacity constraints, differentiation makes undercutting less tempting This allows prices to 5/14/2007 makes undercutting less tempting. This allows prices to stay higher than in the homogenous product Bertrand or Cournot models. –P M > P D > P B =MC Π M > Industry Profits D > 0 – Prices and Industry Profits D are higher the more differentiated the products are. Recap - IV • Summary: – In all these standard oligopoly situations, one makes less profits than one would in a monopoly. 5/14/2007 – Two reasons: split the pie, decreased size of pie – How much lower profits are than the monopoly profits depends on the particulars of the situation (capacity constraints, differentiation, etc.) Question…. • Is there anything we can do in these markets to
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Lecture 11 - 5/14/2007 Profits in Oligopolistic Markets...

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