rlecture22 - imperfect competition 3

rlecture22 - imperfect competition 3 - Topic 9: Competition...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
opic 9: Competition between firms (3) Topic 9: Competition between firms (3) Collusion, entry and other considerations USC Marshall
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Introduction • Some further issues: – Firms are engaged in repeated interactions – Firms can enter and exit industries – Firms make many other choices in addition to capacity/pricing – Welfare and antitrust legislation USC Marshall
Background image of page 2
Collusion Collusion: – When interacting only once, the firms could not achieve an equilibrium that would have maximized their joint profits because each firm has incentives to deviate from that outcome and increase their individual profits an repeated interaction help? – Can repeated interaction help? • Yes, as long as the firms don’t discount the future too much USC Marshall
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Collusion Example: – Suppose there are two identical aluminum producers, each with marginal cost of 1. The product is homogeneous so the firms are engaged in Bertrand competition. The demand is given by Q=9-P. rofit aximizing outcome: P=5 and each firm • Profit-maximizing outcome: P=5 and each firm makes $8 in profit • Bertrand equilibrium: P=1 and each firm makes $0 in profit USC Marshall
Background image of page 4
Collusion Repeated game: – But firms don’t choose their prices only once. Can the firms do better than the Bertrand equilibrium if the game is repeated? • Let the discount factor be δ – Consider the following strategy for each firm: • “Begin by choosing the collusive price. If we both have always chosen the collusive price up ntil today choose the collusive price again until today, choose the collusive price again. However, if either one of us ever priced below the collusive price, then choose P=MC forever” USC Marshall
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Collusion Payoffs: – If I follow the strategy and expect the other to follow the strategy, then we end up choosing the collusive price forever. The present value of this profit stream is I cheat today I will choose a price just below 5 8 8 2 8 3 8 ... 8 1 8 – If I cheat today, I will choose a price just below 5, giving me the full market and profits of 16 ut then the market price collapses to marginal But then the market price collapses to marginal cost and I will make zero profit after that – Better to cooperate if USC Marshall 8 1 8 16 1 2
Background image of page 6
Collusion • In any game, determining whether collusion is possible and for what discount factors involves three steps: – Solve for the present value of profits from following the collusive strategy – Solve for the profit-maximizing deviation from the ollusive strategy today and the profit associated collusive strategy today and the profit associated with it olve for the present value of profits from tomorrow Solve for the present value of profits from tomorrow on, following the retaliation by the other firms – If first is greater than the sum of the latter two, then USC Marshall collusion is sustainable
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Collusion Factors inhibiting collusion:
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 09/10/2009 for the course BUAD 351 taught by Professor Eastin during the Spring '07 term at USC.

Page1 / 41

rlecture22 - imperfect competition 3 - Topic 9: Competition...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online