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: ² Pricing by segment ² No capacity constraint and no arbitrage possibilities ² Capacity constraint and no arbitrage possibilities ² No capacity constraint and arbitrage possibilities ² Omit: Capacity constraint and arbitrage possibilities ± Bundling: ² Prices for bundled vs. individual products ² Pure bundling ² Mixed bundling S. Ajaz Hussain. [email protected] 2
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Today ± Models of Oligopoly ± Cournot Oligopoly ² Firms choose output simultaneously ² Market price depends on total output ± Stackelberg Oligopoly ² Firms choose output sequentially ² Market price depends on total output ± Bertrand Oligopoly ² Firms choose prices ² Firms sell corresponding output 3 Contrast with monopoly and perfect competition
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Motivating Example: PTC ± Recall PTC: ² P = 1,466 – 4.83Q and C = 197,820 + 28Q ± Analysis of PTC has been as if it is a monopoly ± Begs obvious question: ² 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” ² Should PTC choose output simultaneously? ² Should PTC choose output after rival chooses its output? ² 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: ² P = a b Total Output ² Assume all firms have identical cost functions: ² C 1 = TFC + constant*q 1 ² 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
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This note was uploaded on 05/02/2011 for the course ECO 204 taught by Professor Hussein during the Fall '08 term at University of Toronto.

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204_summer_2009_lecture_21 - University of Toronto...

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