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������� �� ��� ���������� � � ��� ������� ����� �� �������������� ����������� � ������� ������� � ��� ���� ������� �� ������� ������ ������ ��������������� ���� ��� ������ ��� ������ �� ��� ���������� �� ����� � �������� ����� � ������������ � ������ ����� ����� ���������� ������ ��� ������ ��
������ ��� ���������� ���� �������� � ������� ����������� � ���� ����������� �� ������� ������� ����� ������ ������ ��� ����� �������� ������ ���������� Lecture 17: Oligopoly Continued (Chapter 12) I. Cournot Math
• Cournot: All ﬁrms set quantities at the same time
• Calculate residual demand for a given ﬁrm and solve its proﬁt maximization problem to ﬁnd its
best response function to other ﬁrms’ output decisions.
• Solution is a set of quantities (one for each ﬁrm) that solves this system of equations.
II. Cooperative Equilibrium  Cartels
• Firms can form a cartel and behave like a single monopolist, maximizing total industry proﬁts.
• Cartels are unusual because they are fundamentally unstable (incentive to “cheat” and raise own
production) and because they are illegal (antitrust laws).
III. Comparing Equilibria
• In terms of welfare, usually Perfect Competition > Oligopoly > Monopoly
• Quantity as an indicator of social welfare
• DWL in welfare analysis comes from trades that aren’t made
IV. Many Firms
• In Cournot, as number of ﬁrms → ∞, Cournot equilibrium approaches competitive equilibrium
• As number of ﬁrms → 1, approaches monopoly
• Markup over competitive price depends on number of ﬁrms and elasticity of demand:
p − MC
p =− 1
n V. Price Competition
• Bertrand: ﬁrms set prices (instead of quantities) at the same time
• Two ﬁrms may be enough to remove market power (i.e. restore competitive outcome) if products
are identical
• Recall proof from class that identical Bertrand duopolists drive price down to marginal cost
• Also recall the Stackelberg model where one ﬁrm set their quantity before the other ﬁrm. In this
case, the best response function for the Stackelberg leader takes into account the fact that the
follower will respond to the leader’s output decision. � MIT OpenCourseWare
http://ocw.mit.edu 14.01SC Principles of Microeconomics Fall 2011 For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms ....
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