{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Lecture 5 Oligopoly 2010

# Lecture 5 Oligopoly 2010 - ECON 4109H LECTURE 5 Oligopoly...

This preview shows pages 1–8. Sign up to view the full content.

ECON 4109H LECTURE 5 Oligopoly October 25, 2010 ECON 4109H LECTURE 5

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Oligopoly How does competition among firms depend on characteristics of demand for firms’ output, the nature of firms’ cost functions, and the number of firms? Will benefits of technological improvements be passed on to consumers? Will reduction in the number of firms generate less desirable outcomes? To answer these questions we will build a model of oligopoly (competition among a small number of sellers). ECON 4109H LECTURE 5
General Model Single good produced by n firms. Cost to firm i of producing q i units of a good C i ( q i ) ; C i is an increasing function (more output more costly to produce). All output sold at single price, determined by demand for the good and firms’ total output. With output Q , market price is P ( Q ) . P is that inverse demand function. Assume that P is a decreasing function when positive: if total output increases, then price decreases (unless already zero). Output of firm i is q i price is P ( i q i ) . profit=revenue minus cost: π ( q 1 , . . . , q n ) = q i P ( X i q i ) - C i ( q i ) ECON 4109H LECTURE 5

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Cournot Oligopoly Game Players The firms Actions Each firms’ set of actions is the set of possible outputs Preferences Firms preferences represented by profits. ECON 4109H LECTURE 5
Duopoly with Constant Unit Cost and Linear Inverse Demand 2 firms. C i ( q i ) = cq i Inverse Demand: P ( Q ) = α - Q , if Q 6 α ; 0, if Q > α . Assume that c < α so that for some value of total output Q , the market price > unit cost. ECON 4109H LECTURE 5

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Duopoly with Constant Unit Cost and Linear Inverse Demand π 1 ( q 1 , q 2 ) = q 1 ( P ( q 1 + q 2 ) - c ) = q 1 ( α - c - q 1 - q 2 ) , if q 1 + q 2 6 α ; - cq 1 , otherwise. ECON 4109H LECTURE 5
Duopoly with Constant Unit Cost and Linear Inverse Demand Observe that a higher quantity for firm 2 leads to a lower price, and hence a lower profit for firm 1 when producing any quantity q . Observe that ∂π 1 q 2 q 1 ( q 1 , q 2 ) = - 1 < 0 if q 1 + q 2 < α , and is equal to 0 otherwise. This implies that if 2 increases his quantity, this will make 1 want to lower his quantity.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern