Topic11_Oligopoly - Oligopoly and Monopolistic Competition Monopolistic Competition Ratna K Shrestha Oli Oligopoly Characteristics Small number of

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Topic 11 Oligopoly and onopolistic Competition Monopolistic Competition Ratna K. Shrestha
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Oligopoly – Characteristics mall number of firms Small number of firms Product differentiation may or may not exist Barriers to entry Patents Technology Name recognition Strategic action Scale economies 2
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Oligopoly Examples Automobiles Steel Petrochemicals Hockey Skates 3
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Oligopoly anagement Challenges Management Challenges Strategic actions to deter entry such as hreaten to decrease price against new Threaten to decrease price against new competitors by keeping excess capacity ival behavior Rival behavior Each firm must consider how its actions (pricing or output decisions) will affect its (p g p ) rivals and in turn how these rivals will react. 4
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ligopoly quilibrium Oligopoly – Equilibrium ash Equilibrium Nash Equilibrium Each firm is doing the best it can given hat its competitors are doing. what its competitors are doing. Cournot Duopoly: arkets in which o rms compete in Markets in which two firms compete in choosing quantities . E.g., Bauer vs. CCM in Hockey Skate market; American airlines vs. United. Each firm will adjust its output based on its 5 belief about its rival’s output.
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ligopoly quilibrium Oligopoly – Equilibrium o if American Airlines believes that United So if American Airlines believes that United will produce 64, then it faces the new (residual) demand = total D – United’s supply (which is equal to 64). Facing the new demand, America maximizes its profits where its new MR = MC. This is American’s best response (reaction function) to its belief about United’s output. 6
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Reaction Curves and Cournot Equilibrium Q 1 American’s Reaction 192 Curve Q* 2 (Q 1 ) 96 x Cournot Equilibrium 64 United’s Reaction Curve Q* 1 (Q 2 ) 7 Q 2 64 96 192 x
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The Linear Demand Curve An Example of the Cournot Equilibrium Market demand: P = 339 - Q Q is total production of both firms: Q = Q 1 + Q 2 Assume (for simplicity) both firms have MC 1 = MC 2 = 147 8
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Oligopoly Example Firm 1”s Total Revenue 39 Q 1 1 1 ) 339 ( Q Q PQ R 1 2 1 1 ) ( 339 Q Q Q Q 1 2 2 1 1 339 Q Q Q Q 2 1 1 1 1 2 339 Q Q dQ dR MR 9
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Oligopoly Example y iven urve tion e ' irm 147 by given is Curve action Re s 1' Firm 1 1 MC MR urve eaction ' rm imilarly, ) 1 ( ....... .......... 2 1 96 2 1 Eq Q Q ) 2 ( ...... .......... 2 1 96 Curve Reaction s 2 firm Similarly, 1 2 Eq Q Q 10
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Oligopoly Example Solving Eq (1) and (2): 4 4 function demand From 64 ; 64 2 1 Q Q 211 $ 128 339 P 11
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irm 2’s Effect of Subsidy Q 1
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This note was uploaded on 05/11/2011 for the course COMM 295 taught by Professor Ratna during the Winter '09 term at The University of British Columbia.

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Topic11_Oligopoly - Oligopoly and Monopolistic Competition Monopolistic Competition Ratna K Shrestha Oli Oligopoly Characteristics Small number of

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