Lecture 23 Mar 27 exam 2

Lecture 23 Mar 27 exam 2 - Announcements MT2 on Wednesday....

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Announcements MT2 on Wednesday. Will cover chapters 7-10 Monday will be review (after about 10 mins of new stuff). HW for ch10 due on Monday We won’t get through all this today but this will be on the MT (so we’ll do some lecturing on Monday) 1 of 38
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2 of 38 OLIGOPOLY The Price-Leadership Model of Oligopoly As in the other oligopoly models, an oligopoly with a dominant price leader will produce a level of output between the output that would prevail under perfect competition and the output that a monopolist would choose in the same industry. It will also set a price between the monopoly price and the perfectly competitive price. price leadership A form of oligopoly in which one dominant firm sets prices and all the smaller firms in the industry follow its pricing policy.
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Price Leadership Model of Oligopoly The price-leadership model assumes that the industry is made up of one dominant firm and a number of smaller competitive firms. It assumes that the dominant firm maximizes profit subject to the constraint of the market demand and assumes that the dominant firm lets the smaller firms sell as much as they want at the price the leader has set. If the dominant firm knows the smaller firms will follow its lead, then it can derive its demand curve by subtracting from total market demand the amount of demand that the smaller firms will satisfy. 3 of 38
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Price Leadership Model of Oligopoly So basically, the price leader chooses the quantity and price as a monopolist would but uses its “residual demand” curve rather than the market demand curve. Residual demand is the demand the leader faces after all follower firms sell whatever they want to at the price chosen by the leader. 4 of 38
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5 of 38 Demand, MR for Price Leader -9 -7 -5 -3 -1 1 3 5 7 9 11 1 2 3 4 5 6 7 8 9 10 12 Q P MR Residual D Market Produced by price followers
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Price Leadership Oligopoly 6 of 38 Q $ MR AC MC Residual D Maximum Profit 30 $3.50 $5 Market D
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7 of 38 OLIGOPOLY The Kinked Demand Curve Model kinked demand curve model A model of oligopoly in which the demand curve facing each individual firm has a “kink” in it. The kink results from the assumption that competitor firms will follow if a single firm cuts price but will not follow if a single firm raises price.
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8 of 38 OLIGOPOLY A Kinked Demand Curve Oligopoly Model
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9 of 38 OLIGOPOLY The Cournot Model The Cournot model of oligopoly results in a quantity of output somewhere between output that would prevail if the market were perfectly competitive and output that would be set by a monopoly. Cournot model A model of a two-firm industry (duopoly) in which a series of output adjustment decisions leads to a final level of output between the output that would prevail if the market were organized competitively and the output that would be set by a monopoly.
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Cournot Model of Oligopoly Augustin Cournot put the oldest model of oligopoly behavior forward almost 150 years ago. The Cournot model is based on three assumptions: (1) that there are
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This note was uploaded on 08/15/2011 for the course ECON 2005 taught by Professor Zirkle during the Spring '07 term at Virginia Tech.

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Lecture 23 Mar 27 exam 2 - Announcements MT2 on Wednesday....

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