1
Finally the last week!
Oligopoly
Chapter 27
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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.
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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.
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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
).
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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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