301lec20

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

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Unformatted text preview: Lecture 20 Econ 301 Professor S. Severinov Oligopoly 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 firms action depends on the actions of the other firms 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 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 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 Slide 6 Oligopoly- Duopoly The market for movies in a medium size city of Durham. Sonys 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. 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 rivals capacity). MSMs 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 MSMs profits when Loews chooses q* L. q* L maximizes Loews profits when MSM chooses q* M. Slide 8 Duopoly: Loews & MSM Profit Functions of MSM and Loews are: Nash equilibrium: every firm is at its best response to the rivals action....
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301lec20 - Lecture 20 Econ 301 Professor S. Severinov...

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