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# lecture13kg - Introduction to Microeconomics Lecture 13...

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Introduction to Microeconomics Lecture 13 Oligopoly Kathryn Graddy

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Outline Cournot Cournot vs. Collusion Von Stackelberg Bertrand Kreps and Scheinkman
Cournot Oligopoly Augustin Cournot (1838) Two Firms: a “Duopoly” Homogeneous product Firms decide on Quantities to supply Market price determined by total Quantity Supplied equal to Market Demand Firms attempt to maximise their own profits, assuming their rival’s quantity is given

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q A q B ISOPROFIT CURVES FOR FIRM A Π Π Π Π q B1 q B2 q * q B3 q B4 q * q * q * A’s REACTION FUNCTION Π < Π < Π < Π
q A q B q B4 * q B1 * q B2 * q B3 * q A4 q A3 q A2 q A1 ISOPROFIT CURVES FOR FIRM B B’s REACTION FUNCTION Π B1 Π B4 Π B3 Π B2 Π B1 < Π B2 < Π B3 < Π B4

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q A q B B’s REACTION FUNCTION A’s REACTION FUNCTION = A’s best-response function COURNOT EQUILIBRIUM q q BCournot
Cournot conclusions At the intersection of the reaction functions, Firm A is maximizing profits given firm B’s output, and vice versa This is an equilibrium Total output in Cournot Equilibrium is greater than monopoly output but smaller than perfectly competitive output. Therefore price is similarly between monopoly and perfectly competitive levels As number of firms increases, total output converges to the perfectly competitive level

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Cournot extensions Analysis can be extended to more than two firms firms with differing costs free entry, where new firms enter until the equilibrium profits fall to zero What happens out of equilibrium? Text-books will give you simple dynamic stories, but these are logically flawed – the Cournot model is a “one-shot game” with no possibility of reaction
Cournot Problems Firms are assumed to be naïve: perhaps they

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## This note was uploaded on 04/12/2010 for the course ECON DEAM taught by Professor Vines during the Spring '10 term at Oxford University.

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lecture13kg - Introduction to Microeconomics Lecture 13...

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