PAM_2000_Spring_2009_Lecture_24

PAM_2000_Spring_2009_Lecture_24 - PAM2000:Lecture24 n n n n...

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PAM 2000: Lecture 24 n Final Exam: Thursday May 14th, 7PM n Goldwin-Smith Hall, G64 – Kaufman Audit. n Will post coverage n Agenda: n Oligopoly and monopolistic competition q Cooperative oligopoly: Cartels and policing q Monopolist competition q Non-cooperative oligopoly: Cournot model q Stackelberg leader-follower model
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Cooperative Oligopoly Models:  n Firms have an incentive to form a cartel so that each firm can reduce its output and the group will have higher profits n Cartels: “trusts” in the U.S. n Illegal to explicitly collude to fix q or p n Many firms engage in tacit collusion by signaling to each other through behavior
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Why Form a Cartel? n Suppose n firms, no added entry is possible n Assume the n firms have the same MC and AC curves n If all n firms reduce their output, they can increase profits
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Competition Versus Cartel
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Why Cartels Break Down n Firms then all enjoy monopoly profits n But given that the price is high, at Pm, each firm would like to sell many units at that high price n Each firm considers itself to be a price taker at MR = Pm, and wants to increase output to P*, where MR = its MC i Each firm wants to cheat by expanding output
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Policing Cheating n How firms can detect cheating: q Can examine other firm’s books q Market division (by region or customer) q Industry organizations may report market share q Government may publish data
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Policing Cheating (con’t) n New entry may cause the cartel to fail n If there is enough new entry, then market becomes like a dominant firm (the cartel) with a competitive fringe n Firms can also simply merge instead of colluding, which is one reason why government reviews many large mergers
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This note was uploaded on 11/14/2009 for the course PAM 2000 taught by Professor Evans,t. during the Spring '07 term at Cornell.

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PAM_2000_Spring_2009_Lecture_24 - PAM2000:Lecture24 n n n n...

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