{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Varian_Chapter27_Oligopoly

# Varian_Chapter27_Oligopoly - Chapter Twenty-Seven Oligopoly...

This preview shows pages 1–15. Sign up to view the full content.

Chapter Twenty-Seven Oligopoly

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

View Full Document
Oligopoly A monopoly is an industry consisting a single firm. A duopoly is an industry consisting of two firms. An oligopoly is an industry consisting of a few firms. Particularly, each firm’s own price or output decisions affect its competitors’ profits.
Oligopoly How do we analyze markets in which the supplying industry is oligopolistic? Consider the duopolistic case of two firms supplying the same product.

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

View Full Document
Quantity Competition Assume that firms compete by choosing output levels. If firm 1 produces y 1 units and firm 2 produces y 2 units then total quantity supplied is y 1 + y 2 . The market price will be p(y 1 + y 2 ). The firms’ total cost functions are c 1 (y 1 ) and c 2 (y 2 ).
Quantity Competition Suppose firm 1 takes firm 2’s output level choice y 2 as given. Then firm 1 sees its profit function as Given y 2 , what output level y 1 maximizes firm 1’s profit? Π 1 1 2 1 2 1 1 1 ( ; ) ( ) ( ). y y p y y y c y = + -

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

View Full Document
Quantity Competition; An Example Suppose that the market inverse demand function is and that the firms’ total cost functions are p y y T T ( ) = - 60 c y y 1 1 1 2 ( ) = c y y y 2 2 2 2 2 15 ( ) . = + and
Quantity Competition; An Example Π ( ; ) ( ) . y y y y y y 1 2 1 2 1 1 2 60 = - - - Then, for given y 2 , firm 1’s profit function is So, given y 2 , firm 1’s profit-maximizing output level solves Π y y y y 1 1 2 1 60 2 2 0 = - - - = . I.e., firm 1’s best response to y 2 is y R y y 1 1 2 2 15 1 4 = = - ( ) .

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

View Full Document
Quantity Competition; An Example y 2 y 1 60 15 Firm 1’s “reaction curve” y R y y 1 1 2 2 15 1 4 = = - ( ) .
Quantity Competition; An Example Π ( ; ) ( ) . y y y y y y y 2 1 1 2 2 2 2 2 60 15 = - - - - Similarly, given y 1 , firm 2’s profit function is So, given y 1 , firm 2’s profit-maximizing output level solves Π y y y y 2 1 2 2 60 2 15 2 0 = - - - - = . I.e., firm 1’s best response to y 2 is y R y y 2 2 1 1 45 4 = = - ( ) .

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

View Full Document
Quantity Competition; An Example y 2 y 1 Firm 2’s “reaction curve” y R y y 2 2 1 1 45 4 = = - ( ) . 45/4 45
Quantity Competition; An Example An equilibrium is when each firm’s output level is a best response to the other firm’s output level, for then neither wants to deviate from its output level. A pair of output levels (y 1 *,y 2 *) is a Cournot-Nash equilibrium if y R y 2 2 1 * * ( ). = y R y 1 1 2 * * ( ) = and

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

View Full Document
Quantity Competition; An Example y R y y 1 1 2 2 15 1 4 * * * ( ) = = - y R y y 2 2 1 1 45 4 * * * ( ) . = = - and Substitute for y 2 * to get y y y 1 1 1 15 1 4 45 4 13 * * * = - - = Hence y 2 45 13 4 8 * . = - = So the Cournot-Nash equilibrium is ( , ) ( , ). * * y y 1 2 13 8 =
Quantity Competition; An Example y 2 y 1 Firm 2’s “reaction curve” 48 60 Firm 1’s “reaction curve” y R y y 1 1 2 2 15 1 4 = = - ( ) . 8 13 Cournot-Nash equilibrium ( 29 ( 29 y y 1 2 13 8 * * , , . = y R y y 2 2 1 1 45 4 = = - ( ) .

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

View Full Document
Quantity Competition Π 1 1 2 1 2 1 1 1 ( ; ) ( ) ( ) y y p y y y c y = + - Π 1 1 1 2 1 1 2 1 1 1 0 y p y y y p y y y c y = + + + - = ( ) ( ) ( ) .
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 84

Varian_Chapter27_Oligopoly - Chapter Twenty-Seven Oligopoly...

This preview shows document pages 1 - 15. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online