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301lec21-22 - Lecture 21-22 Part 2 Econ 301 Professor S...

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Slide 1 Lecture 21-22 Part 2 Econ 301 Professor S. Severinov Price (Bertrand) Competition In Oligopoly
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Slide 2 Price Competition Competition in an oligopolistic industry may occur with price instead of output Pricing competition is described by Bertrand Model - Oligopoly model in which firms produce a homogeneous good, all firms decide simultaneously what price to charge, each firm must be at a best response to the competitor’s price
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Slide 3 Price Competition – Bertrand Model Assumptions Homogenous good Market demand is P = 30 - Q where Q = Q 1 + Q 2 MC 1 = MC 2 = $3 Can show the Cournot equilibrium if Q 1 = Q 2 = 9 and market price is $12, giving each firm a profit of $81.
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Slide 4 Price Competition – Bertrand Model Assume here that the firms compete with price, not quantity Since good is homogeneous, consumers will buy from lowest price seller If firms charge different prices, consumers buy from lowest priced firm only If firms charge same price, consumers are indifferent who they buy from
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