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204_summer_2009_lecture_21

204_summer_2009_lecture_21 - University of Toronto...

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University of Toronto Department of Economics ECO 204 Summer 2009 Sayed Ajaz Hussain Lecture 21 1 S. Ajaz Hussain. [email protected]
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Last Time 3 rd degree price discrimination: Pricing by segment No capacity constraint and no arbitrage possibilities Capacity constraint and no arbitrage possibilities No capacity constraint and arbitrage possibilities Omit: Capacity constraint and arbitrage possibilities Bundling: Prices for bundled vs. individual products Pure bundling Mixed bundling S. Ajaz Hussain. [email protected] 2
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Today Models of Oligopoly Cournot Oligopoly Firms choose output simultaneously Market price depends on total output Stackelberg Oligopoly Firms choose output sequentially Market price depends on total output Bertrand Oligopoly Firms choose prices Firms sell corresponding output 3 Contrast with monopoly and perfect competition
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Motivating Example: PTC Recall PTC: P = 1,466 – 4.83Q and C = 197,820 + 28Q Analysis of PTC has been as if it is a monopoly Begs obvious question: How will analysis change if there is a rival to PTC? Start by recognizing that data service is “homogeneous” Price of Commercial hours depends on combined “output” Should PTC choose output simultaneously? Should PTC choose output after rival chooses its output? Should PTC choose output before rival chooses its output? S. Ajaz Hussain. [email protected] 4
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3 Models of Output Choice S. Ajaz Hussain. [email protected] 5 Monopoly Cournot Oligopoly Stackelberg Oligopoly One firm Few firms Few firms Firm chooses output ceteris paribus Firms choose output simultaneously ceteris paribus Firms choose output sequentially ceteris paribus Total monopoly Q < Total Cournot Q < Total Stackelberg Q Monopoly price > Cournot price > Stackelberg price Pay attention to the meaning of ceteris paribus
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Simplifying Assumptions Suppose there are two firms Market demand: P = a b Total Output Assume all firms have identical cost functions: C 1 = TFC + constant*q 1 C 2 = TFC + constant*q 2 Each firm chooses output, ceteris paribus , to maximize its profits S. Ajaz Hussain. [email protected] 6 MC = constant
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Benchmark Analysis: Monopoly S. Ajaz Hussain. [email protected] 7 Algebraic Result P = a bQ C = TFC + c q MR = a 2bq MC = c MR = MC a 2bq = c q = (a c)/2b PTC Example P = 1,466 – 4.83Q C = 197,820 + 28q MR = 1,466 – 9.66q MC = 28 MR = MC 1,466 – 9.66q = 28 q = (1,466 28)/9.66 148.9
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Analysis: Cournot Oligopoly S. Ajaz Hussain. [email protected] 8 Firm 1 Output 1 ceteris paribus Inputs Output “takers” Market
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