1.2 oligopoly

# 1.2 oligopoly - 1.2 Application Oligopoly Market Two...

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1.2 Application – Oligopoly Market

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Two Simultaneous Move Game Cournot competition Firms compete in output Bertrand Competition Firms compete in price
Nash Equilibrium in Oligopoly A set of strategies is called a Nash equilibrium if, holding the strategies of all other firms constant, no firm can obtain a higher profit by choosing a different strategy. In a Nash equilibrium No firm wants to change its production level in Cournot Model No firm wants to change its price in Bertrand Model

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Cournot Competition More than one firm No product differentiation: homogeity No collusion, i.e. no cooperate Firms have market power, i.e. each firm's output decision affects the good's price No entry: the number of firms is fixed Firms compete in quantities Simultaneous move Rationality: usually seeking to maximize profit given their competitors' decisions
A strategic form of Cournot Consider two firms produce homogenous products with marginal cost is 0 and no fixed cost. The output level can be chosen from 10, 30, and 50. The inverse market demand function is P=100-Q, with Q=q 1 +q 2 . Find the Nash equilibrium of this game.

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The Normal Form Game q 2 10 30 50 q 1 10 80 800,800 60 600,1800 40 400,2000 30 60 1800,600 40 1200,1200 20 600,1000 50 40 2000,400 20 1000,600 0 0,0
Two firms: strategies Firm 1 sets output level q 1 Firm 2 sets output level q 2 Homogeneity : Q=q

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## This note was uploaded on 04/27/2011 for the course ECO 355 taught by Professor Xu during the Fall '10 term at SUNY Stony Brook.

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1.2 oligopoly - 1.2 Application Oligopoly Market Two...

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