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7-Oligopoly (1)

7-Oligopoly (1) - Oligopoly and Multi-firm Competition Econ...

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Oligopoly and Multi-firm Competition Econ 382 Brennan Platt, Ph.D.
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Crucial Skills Models: •Cartel •Cournot •Stackleberg •Bertrand Nash •Spatial Competition •Entry Deterrence Set up: •Objective, constraints, and equilibrium conditions for each of the models above Solve: •Equilibrium prices and quantities •Comparative statics Illustrate: Concepts: •Collusion •Entry and Exit Decisions
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Oligopoly Defined: An industry with several large firms that are strategically interdependent Competitors Collaborators Conspirators
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Example Several firms produce the same homogenous good Each has a cost function Due to homogeneity, law of one price holds Price is determined by total output of the firms Market demand is
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Quasi Competitive Model Firms act as if their output does not affect price Individual firms solve: – Result: P = MC i ( q i ) In equilibrium, and for all i – If MC i cannot equate, only those with lower marginal cost will produce.
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Cartel Model The firms act as a single monopoly, maximizing industry profits Collusion – an agreement between competitors to raise price, restrict output Industry “czar” solves:
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Cartel issues Czar chooses output so Will result in monopoly-like behavior (identical if all firms have the same constant marginal cost and no fixed cost) Highly inefficient if there are economies of scale Each firm has an incentive to cheat…
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Cournot Model Each firm recognizes how their output affects the market price Each firm chooses output independently to maximize individual profit:
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