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# ch27lec - ECON 306 Chapter 27: Oligopoly RUST, CHO, DIAZ...

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Unformatted text preview: ECON 306 Chapter 27: Oligopoly RUST, CHO, DIAZ Introduction 1. Oligopoly is the study of the interaction of a small number of firms 2. Duopoly is the simplest case: only two firms. 3. It is unlikely to have a general solution; this will depend on market structure and specific details of how firms interact. So we need different models. Classification of theories 1. Non-collusive a) Sequential moves 1) Quantity setting – Stackelberg model 2) Price setting b) Simultaneous moves 1) Quantity setting – Cournot model 2) Price setting – Bertrand model 2. Collusive Stackelberg model – sequential quantity setting 1. One firm is the quantity leader (set the quantity first), the other is the follower . 2. Leader sets quantity to maximize its profits taking into account that the follower will react to its quantity choice. 3. The inverse demand function depends on total output, thus we have ) ( 2 1 y y p ¡ . 4. Assume Firm 1 is leader and Firm 2 is follower. Solve backwards: a) Follower’s problem 1) ) ( ) ( max 2 2 2...
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## This note was uploaded on 10/25/2011 for the course ECON 326 taught by Professor Hulten during the Spring '08 term at Maryland.

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ch27lec - ECON 306 Chapter 27: Oligopoly RUST, CHO, DIAZ...

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