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Unformatted text preview: Chapter 12: Monopolistic Competition and Oligopoly CHAPTER 12 MONOPOLISTIC COMPETITION AND OLIGOPOLY TEACHING NOTES Students viewing this material for the first time can be overwhelmed because of the number of models presented. Chapter 12 discusses seven models: monopolistic competition, Cournot-Nash, Stackelberg, Bertrand, non-cooperative game, kinked demand, and price leadership. You might want to concentrate your attention in class on the more basic models, e.g., monopolistic competition, Cournot-Nash, non-cooperative game, and price leadership. You can otherwise pick and choose among the models as time permits. When introducing the material in this chapter, start by reviewing the basic results of the models of competition and monopoly. When presenting monopolistic competition, focus on why positive profits encourage entry and on the similarities and differences of this model with competition and monopoly. The example of brand competition in cola and coffee markets presented at the end of Section 12.2 facilitates a class discussion of the costs and benefits of freedom of choice among a vast array of brand names and trademarks. The chapter ends with two topics that invoke opinions from almost every student: an application on OPEC and Example 12.5, “The Cartelizaton of Intercollegiate Athletics.” Students may find the Cournot-Nash duopoly model to be a drastic change from the worlds of competition and monopoly. The key to understanding Cournot-Nash is a grasp of reaction functions. Stress that reaction functions are being graphed on axes that represent quantities (see Figure 12.4). Once they understand reaction functions, they will be able to follow the assumptions, reasoning, and results of the Cournot-Nash, Stackelberg, and Bertrand models. Although they might not comprehend the algebraic derivation of the Cournot-Nash equilibrium, point out the representations in Figure 12.5 of the competitive, Cournot-Nash, and collusive (monopoly) equilibria. Figure 12.5 gives the impression that the duopolists always have symmetric reaction curves. Exercise (2) shows that if the cost structures are not identical, the reaction curves are asymmetric. While the Nash equilibrium, payoff matrices, and the Prisoners’ Dilemma are introduced in this chapter, more attention is allotted to them in Chapter 13. If you will be covering Chapter 13, you can postpone discussion of Section 12.5, using it as a bridge between oligopoly theory and game theory. The discussion of a non-cooperative game is intuitive, but some students find payoff matrices theory....
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- Winter '09
- Monopolistic Competition, Firm