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ECMC41-Lec7 - ECMC41 Lecture 7 Strategic behaviour Vertical...

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ECMC41 – Lecture 7
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2 Strategic behaviour & Vertical relationships 1. Non-pricing strategies Investment in R&D Raising rival s costs 2. Vertical integration 3. Vertical restrictions
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3 1. Non-cooperative strategic behavior Pricing strategies Predatory pricing Limit pricing Non-pricing strategies Investment in R&D (model) Raising rival s costs
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4 Cost functions 6 $ , 1 $ 1 1 = = A A MC F 6 $ , 1 $ 2 2 = = A A MC F 6 $ , 1 $ 2 2 = = A A MC F 6 $ , 1 $ 2 2 = = B B MC F 4 $ , 1 $ 2 2 = = A A MC F 4 $ , 1 $ 2 2 = = A A MC F 6 $ , 1 $ 2 2 = = B B MC F Case I: A does not invest. Case Ia: If B does not enter: A is the monopolist Case Ib: If B enters: A and B are Cournot competitors Case II: A invests. Case IIa: If B does not enter: A is the monopolist Case IIb: If B enters: A and B are Cournot competitors 6 $ , 01 . 8 $ 1 1 = = A A MC F Investment in R&D
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5 Case I: Firm A does not invest Period 1: Firm A: F=$1, MC=$6 Period 2: Case Ia: B does not enter, A remains a monopolist. - A s total profit (for both periods combined) = $16 - B s profit =$0 Case Ib: B enters, Cournot rivals - A s total profit=$8+$3 =$11 - B s profit =$3 ( 29 ( 29 8 $ , 9 $ 6 1 12 1 * 1 1 1 1 1 = = = + - - = A A A A A p FOC q q q Max π π ( 29 ( 29 3 $ , 8 $ 6 1 12 2 2 * 2 2 2 2 2 2 = = = + - - - = B A A A B A A p q q q q Max π π π
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6 Case II: A invests in R&D (with additional fixed cost $7.01) Period 1: Firm A: F = $1+$7.01, MC=$6 A s profit =$8 - $7.01= $0.99 Period 2: Case IIa: B stays out, A remains a monopolist with MC=$4. - A s total profit (for both periods combined) = $0.99+$15 = $15.99 - B s profit =$0 Case IIb: B enters, Cournot rivals - A s total profit=$0.99+$10.11=$11.1 - B s profit =$0.77 ( 29 ( 29 77 . 0 $ , 11 . 10 $ , 33 . 7 $ 4 1 12 2 2 * 2 2 2 2 2 2 = = = + - - - = B A A A B A A p q q q q Max π π π
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7 Incumbent A Not Invest Invest in R&D Entrant B Not Enter Enter (Case Ia) $16 , $0 (Case IIa) $15.99 , $0 (Case Ib) $11 , $3 (Case IIb) $11.10 , $0.77 Pay-off Matrix (total profit both periods combined)
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