Intraindustry_Trade__Lesson_30_

Intraindustry_Trade__Lesson_30_ - Oligopoly and Trade In...

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1 Lesson 30 1 Oligopoly and Trade In this lesson, we extend the concepts developed in the previous lesson to a world with two firms A market with two firms is called a duopoly , which is a special form of the more general oligopoly Lesson 30 2 In general oligopoly is a market with a small number of firms Importantly, the firms behave strategically vis-à-vis one another i.e., when setting price, each firm considers likely responses of rivals Lesson 30 3 While not necessary to consider a structure of oligopoly, it is often the case that there are entry barriers, meaning that it is possible that firms can earn significant profit in equilibrium
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2 Lesson 30 4 Assumptions: Two countries (Home and Foreign) Two firms (Home and Foreign) One good with identical linear demand in each market Initially, each firm is a monopolist in its own market Lesson 30 5 Notation: Let q H and q F represent sales by the home and foreign firm in the home market Let Q H represent aggregate sales in the home market, so that H HF Qqq =+ Lesson 30 6 Notation: Let market demand in the Home country be represented as H PAb Q =− ( ) H F q q + So that
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3 Lesson 30 7 Each firm has to decide how much to sell in the Home market
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Intraindustry_Trade__Lesson_30_ - Oligopoly and Trade In...

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