{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

301lec20 - Lecture 20 Econ 301 Professor S Severinov...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
Lecture 20 Econ 301 Professor S. Severinov Oligopoly
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Oligopoly – Characteristics Small number of firms Product differentiation may or may not exist Barriers to entry Each Firm affects the price and the total quantity in the market Each firm’s action depends on the actions of the other firms
Background image of page 2
Oligopoly – Equilibrium If one firm decides to change their quantity or cut their price, they must consider what the other firms in the industry will do Could cut price some, the same amount, or more than firm Could lead to price war and drastic fall in profits for all Actions and reactions are dynamic, evolving over time
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Oligopoly – Equilibrium Defining Equilibrium Firms are doing the best they can and have no incentive to change their output or price All firms assume competitors are taking rival decisions into account Nash Equilibrium Each firm is doing the best it can given what its competitors are doing We will focus on duopoly Markets in which two firms compete
Background image of page 4
Oligopoly The Cournot Model Oligopoly model in which firms produce a homogeneous good, all firms decide simultaneously how much to produce each firm treats the output of its competitors as fixed and chooses its best response to it. Firm will adjust its output based on what it thinks the other firm will produce
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Slide 6 Oligopoly- Duopoly The market for movies in a medium size city of Durham. Sony’s Loews Theatres and local Main Street Movies (MSM) are the two players. The demand for movies: P=12 – Q. P is the price of a ticket (in $). Q is number of seats (in ‘000) demanded per week. The marginal cost of offering movie shows for each firm is not important, what matters is that both firms have identical and sufficiently small marginal costs which we set to 0. Loews and MSM have to make capacity choices (in thousands of seats) for theatres to build.
Background image of page 6
Slide 7 Duopoly: Loews & MSM Let us solve for Nash equilibrium when capacity choices are made simultaneously (i.e. when making its capacity choice, a firm does not observe its rival’s capacity). MSM’s capacity q M ; Loews’ capacity q L. Zero costs: this assumption is for simplicity, so that we can focus on strategic, not technological factors. Nash equilibrium q* M and q* L must be best responses to each other: q* M maximizes MSM’s profits when Loews chooses q* L. q* L maximizes Loews’ profits when MSM chooses q* M.
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Slide 8 Duopoly: Loews & MSM Profit Functions of MSM and Loews are: Nash equilibrium: every firm is at its best response to the rival’s action.
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}