Lecture10_Oligopoly2

# Lecture10_Oligopoly2 - Lecture 10 Oligopoly Models and Game...

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Click to edit Master subtitle style  11/5/10 Lecture 10 Oligopoly Models and Game Theory Econ 121: Industrial Organization UC Berkeley Fall 2010 Prof. Cristian Santesteban

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11/5/10 Overview Bertrand with Differentiated Products Cournot Revisited Monopolistic Competition Game Theory – Review
PRICE COMPETITION Price Competition with Differentiated Suppose each of two duopolists has fixed costs of \$20 but zero variable costs, and that they face the same demand curves: Firm 1’s demand: Firm 2’s demand: Choosing Prices Firm 1’s profit: P 1 * 12 + 2* P 12 + P 1* P 2 - 20 Firm 1’s profit maximizing price: Firm 1’s reaction curve: Firm 2’s reaction curve: 1 1 2 12 2 Q P P = - + 2 2 1 12 2 Q P P = - + 1 2 1 3 4 P P = + 1 1 1 2 / 12 4 0 P P P π = - + = 2 1 1 3 4 P P = + What are equilibrium prices?

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PRICE COMPETITION Price Competition with Differentiated Here two firms sell a differentiated product, and each firm’s demand depends both on its own price and on its competitor’s price. The two firms choose their prices at the same time, each taking its competitor’s price as given. Firm 1’s reaction curve gives its profit- maximizing price as a function of the price that Firm 2 sets, and similarly for Firm 2. The Nash equilibrium is at the intersection of the two reaction curves: When each firm charges a price of \$4, it is doing the best it can given its competitor’s price and has no incentive to change price. Also shown is the collusive equilibrium: If the firms cooperatively set price, they will choose \$6. Nash Equilibrium in Prices
PRICE COMPETITION – Bertrand with Differentiated Example: Assuming that P&G’s competitors face the same demand and cost conditions, ?

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Lecture10_Oligopoly2 - Lecture 10 Oligopoly Models and Game...

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