ajaz_204_2009_lecture_20

# ajaz_204_2009_lecture_20 - University of Toronto Department...

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University of Toronto Department of Economics ECO 204 2009 2010 Sayed Ajaz Hussain Lecture 20 1 Ajaz Hussain. Department of Economics. University of Toronto (St. George)

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Today ± Cournot Oligopoly ² No product differentiation ² Firms choose output simultaneously ² Market price depends on total output ± Stackelberg Oligopoly ² No product differentiation ² Firms choose output sequentially ² Market price depends on total output ± Bertrand Oligopoly ² Product differentiation ² Firms choose prices ² Firms sell corresponding output 2 Ajaz Hussain. Department of Economics. University of Toronto (St. George) First choose outputs Price follows from demand function First choose prices Outputs follow from demand functions
3 Models of Output Choice Ajaz Hussain. Department of Economics. University of Toronto (St. George) 3 Monopoly Cournot Oligopoly Stackelberg Oligopoly One firm Few firms Few firms Firm chooses output Firms choose output simultaneously Firms choose output sequentially Total monopoly Q < Total Cournot Q < Total Stackelberg Q Monopoly price > Cournot price > Stackelberg price

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Motivating Example: PTC PTC: P = 1,466 – 4.83Q and C = 197,820 + 28Q Analysis of PTC was as if it’s a monopoly ‐‐ what if there is an identical rival? Start by recognizing that data service is “homogeneous” Overall price of Commercial hours depends on total hours Cournot oligopoly: choose outputs simultaneously Stackleberg oligopoly: choose outputs sequentially Ajaz Hussain. Department of Economics. University of Toronto (St. George) 4 Single price for commercial hours
Simple Cournot Oligopoly Model Market demand: P = a b[Total Quantity] There are two firms Firms have unlimited capacity C 1 = TFC + constant*q 1 and C 2 = TFC + constant*q 2 Firm choose output to maximize profits Ajaz Hussain. Department of Economics. University of Toronto (St. George) 5

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Monopoly Ajaz Hussain. Department of Economics. University of Toronto (St. George) 6 Algebraic Result P = a bq C = TFC + c q MR = MC a–2bq = c q = (a–c)/2b P = (a + c)/2 One PTC P = 1,466 – 4.83q C = TFC + 28q MR = MC 1,466 – 9.66q = 28 q = (1,466 – 28)/9.66 148.9 P = (1,466 + 28)/2 \$747 Assuming Max
Cournot Oligopoly Ajaz Hussain. Department of Economics. University of Toronto (St. George) 7 Algebraic Result P = a bQ = a b(q 1 + q 2 ) C i = TFC + c q i ,i= 1, 2 MC 1 = MC 2 = c Firm 1 P = a–bQ= a–bq 2 –bq 1 MR 1 = a–bq 2 –2bq 1 Firm 2 P = a–bQ= a–bq 1 –bq 2 MR 2 = a–bq 1 –2bq 2 2 PTC’s Example P = 1,466 – 4.83(q 1 + q 2 ) C i = TFC + 28q i ,i= 1, 2 MC 1 = MC 2 = 28 Firm 1 P = 1,466 – 4.83q 2 – 4.83q 1 MR 1 = 1,466 – 4.83q 2 – 9.66q 1 Firm 2 P = 1,466 – 4.83q 1 – 4.83q 2 MR 2 = 1,466 – 4.83q 1 – 9.66q 2

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Cournot Oligopoly Ajaz Hussain. Department of Economics. University of Toronto (St. George)
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ajaz_204_2009_lecture_20 - University of Toronto Department...

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