Lecture+18+November+10

# Lecture+18+November+10 - Todays agenda Models of imperfect...

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Today’s agenda Models of imperfect competition Oligopoly Monopolistic competition

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Multiplant monopoly Rule for profit maximization MR = MC 1 = MC 2 If MC 1 > MC 2 , the firm should shift production from plant 1 to plant 2. If MR > MC 1 , the firm should increase production in plant 1.
Cartels P > MR = MC 1 = MC 2 It will always increase total industry profits for all the firms in a perfectly competitive industry equilibrium to restrict output. In competitive equilibrium, P = MC 1 (Q 1 ) = MC 2 (Q 2 ) Joint profit maximization calls for P > MC 1 (Q 1 ) = MC 2 (Q 2 ) Such an output restriction is called a cartel .

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Cartel difficulties Need to prevent entry Need to enforce output restrictions Any firm has an incentive to expand its output if no one else does.

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Oligopoly Oligopoly = “few sellers” Total profits of any industry are always larger if firms cooperate in charging high P and restricting Q MC 1 = MC 2 = … = MC n = MR < P Any single firm increases its profit if it defects from such an agreement and increases Q MC 1 < MR 1 = P Oligopolistic firms recognize that they are interdependent .
Nash equilibria 2,8 4,6 3,8 Bottom 0,7 3,4 2,5 Middle Player 1 1,3 4,5 1,4 Top Right Center Left Player 2 A Nash equilibrium is comprised of a strategy for every player, each of which is a best reply to the other’s strategy.

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2,8 4,6 3,8 Bottom 0,7 3,4 2,5 Middle Player 1 1,3 4,5 1,4 Top Right Center Left Player 2 Step 1: Find the column maxima for 1. Step 2: Find the row
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## This note was uploaded on 10/25/2011 for the course ECONOMICS 01:220:102 taught by Professor Prusa during the Fall '10 term at Rutgers.

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Lecture+18+November+10 - Todays agenda Models of imperfect...

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