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# 191T6 - ECON191(Spring 2010 8 9 12.4.2010(Tutorial 6...

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1 ECON191 (Spring 2010) 8, 9 & 12.4.2010 (Tutorial 6) Chapter 8 Monopolistic Competition and Oligopoly (Chapter 12 of textbook) Oligopoly : market or industry with two or a few firms. The simplest case is Duopoly. Cournot equilibrium : a pair of output levels, one for each firm, which are such that after they are choose, neither firm has incentive to change its output level. Reaction function (best response function): it specifies a firm’s optimal choice of output given the choices of its rivals. Nash equilibrium : set of strategies or actions in which each firm does the best it can given its competitors’ actions Representing the Cournot duopoly game by algebra Market demand: ) ( 2 1 q q b a p Cost functions: c(q 1 ) = cq 1 , c(q 2 ) = cq 2 Firm 1 and firm 2 each faces a maximizing problem at the same time and the two firms are symmetric. MC for both firm = c Firm 1’s Profit function: 1 1 cq pq TC TR Firm 1’s maximizing problem: 1 2 1 2 1 1 1 0 1 cq q bq bq aq Max q FOC: 0 2 2 1 c bq bq a 2 2 2 2 2 1 q b c a b bq c a q (Firm 1’s reaction function) ( a , b , c are constant, b c a 2 is the y- intercept of firm 1’s reaction function and slope = – 1/2) Firm 2’s maximizing problem: 2 2 1 2 2 2 2 0 2 cq q bq bq aq Max q FOC: 0 2 1 2 c bq bq a 2 2 2 1 1 2 q b c a bq c a q (Firm 2’s reaction function)

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191T6 - ECON191(Spring 2010 8 9 12.4.2010(Tutorial 6...

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