ECE1010-08 - UNIT III: COMPETITIVE STRATEGY Monopoly 11/19...

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UNIT III: COMPETITIVE STRATEGY • Monopoly • Oligopoly • Strategic Behavior 11/19
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Market Structure Perfect Comp Oligopoly Monopoly No. of Firms infinite (>)2 1 Output MR = MC = P ??? MR = MC < P Profit No ? Yes Efficiency Yes ? ???
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Oligopoly We have no general theory of oligopoly. Rather, there are a variety of models, differing in assumptions about strategic behavior and information conditions. All the models feature a tension between: Collusion : maximize joint profits Competition : capture a larger share of the pie
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Duopoly Models • Cournot Duopoly • Nash Equilibrium • Leader/Follower Model • Price Competition
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Duopoly Models • Cournot Duopoly • Nash Equilibrium • Stackelberg Duopoly • Bertrand Duopoly
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Monopoly Cyberstax is the only supplier of Vidiot, a hot new computer game. The market for Vidiot is characterized by the following demand and cost conditions: P = 30 - 1/6Q TC = 40 + 8Q
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Monopoly P = 30 - 1/6Q TC = 40 + 8Q MR = 30 - 1/3Q MC = 8 => Q* = 66 P* = 19 Π = TR – TC = PQ – (40 + 8Q) = (19)(66) – 40 -(8)(66) Π = 686 $ 30 P* = 19 Q* = 66 180 Q MC = 8 MR D
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Duopoly Megacorp is thinking of moving into the Vidiot business with a clone which is indistinguishable from the original. It has access to the same production technology, reflected in the following total cost function: TC 2 = 40 + 8q 2 Will Megacorp enter the market? What is its profit maximizing level of output?
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Duopoly If Megacorp (Firm 2) takes Cyberstax’s (Firm 1) output as given, its residual demand curve is P = 30 - 1/6Q Q = q 1 + q 2 ; q 1 = 66 P = 30 - 1/6(q 1 + q 2 ) P = 19 - 1/6q 2 $ 30 19 q 2 = 0 q 1 = 66 180 Q
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Duopoly P = 19 - 1/6q 2 TC 2 = 40 + 8q 2 MR 2 = 19 - 1/3q 2 = MC 2 = 8 => q 2 * = 33 q 1 * = 66 P = 30 – 1/6(q 1 + q 2 ) P* = $13.50 Π 2 = 141.5 Before entry, P* = 19; Π 1 = 686 Now, Π 1 ’ = 323 ow, Π C ‘ = 297 q 1 *+q 2 * = 99 180 Q $ 30 19 13.5 q 2 = 0 MC 2 = 8
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Duopoly What will happen now that Cyberstax knows there is a competitor? Will it change its level of output? How will Megacorp respond? Where will this process end?
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Reaction curves (or best response curves ) show each firm’s profit maximizing level of output as a function of the other firm’s output. q
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ECE1010-08 - UNIT III: COMPETITIVE STRATEGY Monopoly 11/19...

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