rlecture20 - imperfect competition 1

Rlecture20- - opic 9 Competition between firms(1 Topic 9 Competition between firms(1 Bertrand and Cournot competition USC Marshall Introduction •

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Unformatted text preview: opic 9: Competition between firms (1) Topic 9: Competition between firms (1) Bertrand and Cournot competition USC Marshall Introduction • Many markets are best characterized as oligopolistic markets – markets with a few large producers – Cars, computers, home electronics,… • In such markets, the firms need to worry about the strategic interaction among themselves – Use game theory and Nash equilibrium to analyze the equilibrium in such markets USC Marshall Introduction • Models of imperfect competition: – Bertrand competition • Pricing choice with homogeneous products – Cournot competition • Choice of capacity/output with homogeneous products – Competition with differentiated products • Pricing choice with differentiated products • Various models of product differentiation USC Marshall Bertrand competition • Bertrand competition: – Firms choose their price, produce a homogeneous product – Consider two firms (duopoly) producing steel – Marginal cost of a ton of steel is $2 – The total demand for steel is Q = 15-2min(P 1 ,P 2 ) • The firm with the lower price captures the whole market while the other firm sells nothing –What price/output would the firms choose if they could choose it cooperatively? hat price do the firms end up choosing USC Marshall –What price do the firms end up choosing when choosing non-cooperatively? Bertrand competition • Cooperative outcome: – Firms choose a price that maximizes overall profits: P max P − 2 15 − 2 P – This price leads to an overall demand of Q=5.5 15 − 2 P − 2 P − 2 → P 4 3 4 – To split the profits, each firm will produce 2.25 units of output USC Marshall Bertrand competition • Non-cooperative outcome: – Each firm chooses their price to maximize their individual profits – In equilibrium, each firm ends up charging P=2, making zero profit – Key: the product is homogeneous, which means at the customers care only about the price and that the customers care only about the price and thus will buy only from the firm offering the lower price • Each firm has an incentive to undercut the other to gain a bigger market share until all profits are USC Marshall competed away Bertrand competition • Because at P A =P B , the demand is perfectly elastic, the firm has always an incentive lower its price, until P=MC and further cutting would generate negative profits: USC Marshall Bertrand competition • Because at P A =P B , the demand is perfectly elastic, the firm has always an incentive lower its price, until P=MC and further cutting would generate negative profits: P A =P B Q A =Q B Profit New P A Q A New profit 75 75 5625 4.75 2.75 7.5625 USC Marshall Bertrand competition • Because at P A =P B , the demand is perfectly elastic, the firm has always an incentive lower its price, until P=MC and further cutting would generate negative profits: P A =P B Q A =Q B Profit New P A Q A New profit 75 75 5625 47499 5 5 125 4.75 2.75 7.5625 4.47499… 5.5 15.125 USC Marshall Bertrand competition...
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This note was uploaded on 09/10/2009 for the course BUAD 351 taught by Professor Eastin during the Spring '07 term at USC.

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Rlecture20- - opic 9 Competition between firms(1 Topic 9 Competition between firms(1 Bertrand and Cournot competition USC Marshall Introduction •

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