rlecture21 - imperfect competition 2

rlecture21 - imperfect competition 2 - Topic 9: Competition...

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opic 9: Competition between firms (2) Topic 9: Competition between firms (2) Models of product differentiation USC Marshall
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Models of product differentiation Competition with differentiated products: – Products are rarely perfectly homogeneous • An IBM is not a Dell • A BMW is not a Mercedes • Playstation is not an Xbox • Coke is not Pepsi •… – Consequence: raising price a little bit will not cause the firm to lose all its demand USC Marshall
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Models of product differentiation Example: – IBM and Dell are choosing how much to charge for their computers – Demands: Q BM d 30 2 P IBM P Dell Q Dell d 30 2 P Dell P IBM – Marginal cost c of producing a computer is 1 – Profit for each: IBM P IBM 1  30 2 P IBM P Dell Dell P Dell 1  30 2 P Dell P IBM USC Marshall
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Models of product differentiation Solution: Step 1: Profit functions Step 2: Reaction functions Step 3: Nash equilibrium USC Marshall
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Models of product differentiation P IBM BR IBM (P Dell ) BR Dell (P IBM ) USC Marshall P Dell
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Models of product differentiation • Suppose that IBM and Dell merged. How would the equilibrium prices change? – Changes the objective to maximizing joint profits – Solution: P IBM 1  30 2 P IBM P Dell P Dell 1  30 2 P Dell P IBM P IBM P Dell 15 1 Logic: • The two products are substitutes. When pricing 2 independently, the firms don’t internalize the increase in demand (and so profit) experienced y the other firm following a price increase USC Marshall by the other firm following a price increase
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Models of product differentiation P IBM BR IBM (P Dell ) BR Dell (P IBM ) USC Marshall P Dell
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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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rlecture21 - imperfect competition 2 - Topic 9: Competition...

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