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# 142_8 - Cartel and Cournot Equilibrium Cartel equilibrium...

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Villas-Boas - Lecture 8 EEP142 Page 0 Cartel and Cournot Equilibrium – Cartel equilibrium • q1=q2=180 and profits ο 1= ο 2=129/2 – Cournot • q1=q2=240 and profits ο 1= ο 2=115.2/2 – Cournot firms would have an incentive to form a cartel – But each firm would have an incentive to deviate by increase production given that other firms produce at cartel level output

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Villas-Boas - Lecture 8 EEP142 Page 1 Cartel and Cournot Equilibrium – Cartel :q1=q2=180 and profits ο 1= ο 2=129/2 – Cournot : q1=q2=240 and profits ο 1= ο 2=115.2/2 240 180 q2 q1 Cournot Cartel 180 240
Villas-Boas - Lecture 8 EEP142 Page 2 Stackelberg Model: Firm 1 is leader • Firm 1, the leader, knowing how the follower, firm 2, will behave will profit at the follower’s expense • Firm 1 sets q1 • Given q1 firm 2 picks its best response q2=R_1(q1) • So the leader gets residual demand by subtracting from total demand the follower’s output, summarized by the follower’s best response function • The leader chooses q1 such that MC=MR(residual demand) • q1_stack=360, q2_stack=180

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Villas-Boas - Lecture 8 EEP142 Page 3 Stackelberg Model: Firm 1 is leader 240 180 q2 q1 Cournot Stackelberg 240 360 Reaction Function 1 RF 2 \$ q1 q2 q1 mc Market demand Residual demand 360 720 180 RF 2
Villas-Boas - Lecture 8 EEP142 Page 4 Bertrand Model – Firms set prices rather than output for identical products

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142_8 - Cartel and Cournot Equilibrium Cartel equilibrium...

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