Week 8 Lecture_Oligopoly

Week 8 - Week9 1 Thenumberofsellers Thenumberofbuyers Entryconditions Definition:

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1 Week 9 Week 9 Oligopoly Market Structure Oligopoly Market Structure
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2 Market structures differ on four important dimensions: Definition:    Product Differentiation  between two or  more products exists when the products possess  attributes that, in the minds of consumers, set the  products apart from one another and make them less  than perfect substitutes. Examples:   Pepsi is sweeter than Coke, Brand Name  batteries last longer than "generic" batteries. •The number of sellers • The number of buyers • Entry conditions • The degree of product differentiation
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3 Two types of differentiation: "Superiority" ( Vertical Product Differentiation i.e. one product is viewed as unambiguously  better than another so that, at the same price,  all consumers would buy the better product "Substitutability "  ( Horizontal Product  Differentiation ) i.e. at the same price, some  consumers would prefer the characteristics of  product A while other consumers would prefer  the characteristics of product B.
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4 Assume:  Many Buyers               Few Sellers Each firm faces downward-sloping demand  because each is a large producer  compared to the total market size                There is no one dominant model of  oligopoly… we will review several. 1. 1. Oligopolies competing on price. Oligopolies competing on price. 2. 2. Oligopolies competing with quantity. Oligopolies competing with quantity.
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5 1. Bertrand Oligopoly Assume:  Firms set price               Homogeneous product               Simultaneous move               Noncooperative •Firms act  simultaneously  if each firm makes its strategic decision at the same time,  without prior observation of the other firm's decision. •Firms act  noncooperatively  if they set strategy independently, without colluding with  the other firm in any way  In game theory terminology, there is infinitely many  possible actions/strategies for each player: any price a  firm wants to charge.  What’s payoff given a pair of prices?
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6 Homogeneity implies that consumers will buy from the low-price seller. The demand that a firm faces depends both on its own price and on the price set by other firms Specifically, any firm charging a higher price than its rivals will sell no output. Any firm charging a lower price than its rivals will obtain the entire market demand.
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7 Definition:   The relationship between the price  charged by firm i and the demand firm i faces is  firm i's  residual demand In other words,  the residual demand of firm i is the  market demand minus the amount of demand  fulfilled by other firms in the market:  Q 1  = Q - Q 2
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This note was uploaded on 09/06/2010 for the course FBE ECON2113 taught by Professor Franchsica during the Fall '09 term at HKU.

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Week 8 - Week9 1 Thenumberofsellers Thenumberofbuyers Entryconditions Definition:

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