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Oligopoly - Oligopoly MANEC387 EconomicsofStrategy 2002...

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1 © 2002 Some material adapted from Baye © 2002 Oligopoly MANEC 387 Economics of Strategy
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2 © 2002 Some material adapted from Baye © 2002 The Industry Structure Continuum (in number of firms) Number of firms Many  (>15) Monopoly “Perfect”  Competition Oligopoly 1  2  3  4  5  … Monopolistic  Competition
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3 © 2002 Some material adapted from Baye © 2002 Types of Oligopoly Homogeneous Differentiated Quantity Price Lead Time Competition in … Goods are … Cournot Bertrand Stackleberg Differentiated Bertrand
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4 © 2002 Some material adapted from Baye © 2002 Oligopoly Characteristics of oligopoly A few, concentrated sellers who act and react to  each other All firms are selling undifferentiated (or slightly  differentiated) products Few rivals may collectively act like a  monopolist (tacit collusion).  By restricting  output, oligopolists can earn price premia and  economic profits. Actual performance depends on discipline  among rivals to avoid price competition.
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5 © 2002 Some material adapted from Baye © 2002 Cournot Model of Oligopoly A few firms produce similar goods  Firms set output, as opposed to price Each firm reacts to rivals given the  rival’s output Barriers to entry exist
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6 © 2002 Some material adapted from Baye © 2002 Cournot Equilibrium Situation where each firm produces  the output that maximizes its profits,  given the output of rival firms No firm can gain by unilaterally  changing its own output – both firms  are simultaneously producing their  best response to their rival’s output  decision
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7 © 2002 Some material adapted from Baye © 2002 Cournot (Duopoly) Example 2 firms producing a homogeneous product – inverse demand is P(Q) = P(q 1 +q 2 ) = a - q 1 - q 2 Profits for firm 1 are π 1 = q 1 (a – q 1 – q 2 ) – cq 1 – k where marginal cost = c and fixed costs = k Optimal output choice for firm 1 MR = a - 2q 1 – q 2 MC = c – q 1 = (a – q 2 – c)/2
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8 © 2002
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