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Finally the last week!
Oligopoly
Chapter 27
2
Oligopoly
A monopoly is an industry consisting a
single firm.
A duopoly is an industry consisting of two
firms.
An oligopoly is an industry consisting of a
few firms.
Particularly, each firm’s own
price or output decisions affect its
competitors’ profits.
3
Oligopoly
How do we analyze markets in which the
supplying industry is oligopolistic?
Use game theory
We will typically consider the duopolistic
case of two firms supplying the same
product.
4
Four things
Quantity/Cournot competition
: Each firm
noncooperatively
and
simultaneously
choose quantities to maximize profits.
Price/Bertrand competition
: Firms
independently
and
simultaneously
choose prices to maximize profits.
Quantity leadership
:
Sequential
quantity
choice. One firm chooses quantity first.
Other firm chooses quantity next. First firm
is
Stackelberg leader
, second firm is the
Stackelberg follower
.
Collusion:
Firms choose together to
maximize the sum of profits.
5
Quantity/Cournot Competition
Assume that firms compete by choosing
output levels.
If firm 1 produces y
1
units and firm 2
produces y
2
units then total quantity
supplied is y
1
+ y
2
.
The market price will be p(y
1
+ y
2
).
The firms’ total cost functions are c
1
(y
1
)
and c
2
(y
2
).
6
Quantity Competition
Suppose firm 1 takes firm 2’s output level
choice y
2
as given.
Then firm 1 sees its
profit function as
Given y
2
, what output level y
1
maximizes
firm 1’s profit?
1
1
2
1
2
1
1
1
(
;
)
(
)
(
).
y
y
p y
y
y
c
y
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7
Quantity Competition: an example
Market inverse demand function:
where y
T
= y
1
+y
2
Firms’ total cost functions are
p y
y
T
T
(
)
c
y
y
1
1
1
2
(
)
c
y
y
y
2
2
2
2
2
15
(
)
.
8
Quantity Competition: an example
(
;
)
(
)
.
y
y
y
y
y
y
1
2
1
2
1
1
2
60
Then, for given y
2
, firm 1’s profit function is
9
Quantity Competition: an example
Given y
2
, firm 1’s profitmaximizing output level solves
y
y
y
y
1
1
2
1
60
2
2
0
.
10
Quantity Competition: an example
y
y
y
y
1
1
2
1
60
2
2
0
.
Thus for any given y
2
,
firm 1’s best response to y
2
is
y
R
y
y
1
1
2
2
15
1
4
(
)
.
11
Quantity Competition: an example
y
2
y
1
60
15
Firm 1’s “reaction curve”
y
R
y
y
1
1
2
2
15
1
4
(
)
.
12
Quantity Competition: an example
(
;
)
(
)
.
y
y
y
y
y
y
y
2
1
1
2
2
2
2
2
60
15
Similarly, given y
1
, firm 2’s profit function is
So, given y
1
, firm 2’s profitmaximizing output level
solves
y
y
y
y
2
1
2
2
60
2
15
2
0
.
I.e.,
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This note was uploaded on 06/12/2011 for the course ECONOMICS 3291 taught by Professor Professorsnamespublishedtheyarethesoleowners during the Three '11 term at University of New South Wales.
 Three '11
 professorsnamespublishedtheyarethesoleowners
 Economics, Monopoly, Oligopoly

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