Class 15-2010

Class 15-2010 - Managerial Econ Class 15 1 Bertrand...

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THE UNIVERSITY OF BRITISH COLUMBIA Managerial Econ: Class 15 1. Bertrand Oligopoly with Identical Products 2. Bertrand Oligopoly with Differentiated Products 3. Cartels 4. Monopolistic Competition 5. Summary The midterms should be available on Thursday. THE UNIVERSITY OF BRITISH COLUMBIA We have seen the Cournot model. It provides one example of how an oligopoly might behave. There are alternative models. One alternative is the Bertrand model. We will consider just the 2-firm case (duopoly). We will start by considering identical products. The key element of Bertrand oligopoly is that firms treat prices as the strategy variables. Prices for the 2 firms are set at the same time. We will therefore use the Nash equilibrium in prices. Each firm chooses its price to maximize profit taking the (expected) price of the other firm as given. 1. Bertrand Oligopoly with Identical Products
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THE UNIVERSITY OF BRITISH COLUMBIA Bertrand equilibrium Since the good is homogeneous, consumers will buy from lowest price seller. If firms charge different prices, consumers buy from just one firm. If prices are the same consumers are indifferent. At any price above MC each firm has an incentive to undercut the other. The Bertrand-Nash equilibrium with homogeneous products occurs where each firm prices at marginal cost. This outcome is just like perfect competition and is very different from Cournot duopoly. THE UNIVERSITY OF BRITISH COLUMBIA Clicker Question 1 2 of 4 Two firms have constant marginal cost of 10 and no fixed costs. They make simultaneous price decisions. An industry analyst suggests that the equilibrium price will be 11. The problem with this suggestion is: a)If firm 1 expects the other firm to charge 11, it will charge just under 11, so having both firms charge 11 is not a Nash equilibrium. b)If both firms charge 11 each firm regrets that it did not choose a slightly higher price. c)The gain from charging just below 11 is less than the cost from the point of view of one firm. d)The best response to a price of 11 by the other firm is 11. e)All of the above.
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THE UNIVERSITY OF BRITISH COLUMBIA Difference between Cournot and Bertrand 2 of 4 The difference between Bertrand and Cournot arises from using price rather than quantity as the strategy variable.
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Class 15-2010 - Managerial Econ Class 15 1 Bertrand...

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