22-Oligopoly (I)

22-Oligopoly (I) - Agenda Course Overview Oligopoly...

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1 Agenda • Course Overview • Oligopoly • Quantity Competition: The Cournot Model • Price Competition: The Bertrand Model • Product Differentiation and Price Competition • Competition vs. Collusion • What To Take Away Microeconomics The Structure of the Course Consumers and Producers Market Interaction Today’s lecture Uncertainty Perfect competition Monopoly and Pricing strategies Competitive Strategy Auctions Information in Markets and Agency Game Theory Introduction to Markets Consumer Theory and Demand Technology and Production
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2 Agenda • Course Overview • Oligopoly • Quantity Competition: The Cournot Model • Price Competition: The Bertrand Model • Product Differentiation and Price Competition • Competition vs. Collusion • What To Take Away Oligopoly Up to now we have look to two extreme forms of competition: perfect competition and monopoly. Now we move to analyzing how firms compete when there are only a few firms in a market (also called imperfect competition or oligopoly). An Oligopoly is characterized by the following: Small number of firms. Product differentiation may or may not exist. Barriers to entry. Examples: Soft drinks, automobiles, electrical equipment, Steel… Strategic interaction: because there are only a few firms, each one considers not only how its actions may affect its profits but also how the choices of other firms affect its profits.
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3 Agenda • Course Overview • Oligopoly • Quantity Competition: The Cournot Model • Price Competition: The Bertrand Model • Product Differentiation and Price Competition • Competition vs. Collusion • What To Take Away Cournot Equilibrium We start our analysis of equilibrium in Oligopolistic markets by assuming that firms choose how much to produce and sell in the market. To simplify the analysis we start with only two firms, Firm 1 and Firm 2 (i.e. we look at the case of a duopolist): Both firms produce a homogeneous good (there is no brand or quality differentiation between the products of both firms) Consumers are indifferent between buying from Firm 1 or Firm 2 at the same price Industry inverse demand for the good is linear and given by where Q i is the quantity that Firm i produces. 12 () P a b Q Q  
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4 Cournot Equilibrium Firms choose how much to produce: Both firms decide simultaneously how much output to produce. After both firms select their output both firms sell at the market clearing price (given by demand). To simplify, suppose that firms operate under constant marginal costs and both firms have the same costs. We are looking for a Nash equilibrium of this quantity-setting game: firms will adjust their output based on what they believe the other firm will produce.
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This note was uploaded on 11/30/2010 for the course ECON 251 taught by Professor Tontz during the Fall '10 term at USC.

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22-Oligopoly (I) - Agenda Course Overview Oligopoly...

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