Lecture 21 - Apr 13 - Dominant firm, competitive fringe, Bertrand's Model, Product Differentiation,

Lecture 21 - Apr 13 - Dominant firm, competitive fringe, Bertrand's Model, Product Differentiation,

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Unformatted text preview: Economics 100A Lecture #21: Tuesday, April 13 1) Dominant firm/competitive fringe 2) Bertrands model 3) Product differentiation 4) Differentiated Bertrand 5) Monopolistic competition (1) Dominant firm model Mix of monopoly and competition One (or a few) large dominant firm(s) Many, small competitive fringe firms Mix of price making and price taking Dominant firm moves first setting price Competitive fringe firm moves second setting its quantity , taking price as given Work backwards to find equilibrium Fringe supply: S f (p) = i s i (p) Dominant firms residual demand: D d (p) = D(p) - S f (p) Dominant firm equates its MR to its MC: MR d = MC d Q d Q f p B ($/liter) Beer market demand: D B (p B ) Residual demand for Bud MR d (Q d ) Residual demand for Bud: D d (p B ) S f (p B ) p p Q f p B ($/liter) D B (p B ) Dominant Bud MR d (Q d ) D d (pB) S f (p) MC d Q d +Q f p B d Q d Properties of dominant firm model Possibility of Limit Pricing Entry is limited when dominant firm prices below fringe firms shutdown price May or may not be feasible, and may or may not be a profit maximizing strategy Being Fringe may not be so bad Dominant firm curtails output to raise market price for all Fringe produces as much/little as it wants New entry into the fringe Entrants attracted by profits of (existing) fringe Dominant firm must balance its current and future profits Q d p B ($/liter) D B (p B ) Fringe suds MR d (Q d ) D d (pB) S f (p) MC d Q d +Q f p B d S f (p) N f (2) Bertrands model Firms set price instead of quantity More realistic of price making rivals Consumers flock to the low-price seller, splitting demand if all firms charge the same price Otherwise, Bertrand the same as Cournot Homogeneous product sold at one price Fixed number of firms Same/similar costs and no capacity constraints Non-cooperative behavior Completely different equilibrium!! Q = q K +q P , q K , q P p K ($/liter) Cola market demand: D C (p) p K Residual demand for Pepsi D C (p K ) D C (p K ) Residual demand for Pepsi Q = q K +q P , q K , q P p C ($/liter) p K Price shaving D C (p K- 1) D C (p K ) p P = p K- 1 Bertrand reaction functions...
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Lecture 21 - Apr 13 - Dominant firm, competitive fringe, Bertrand's Model, Product Differentiation,

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