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Lecture 11

# MGEA02H3 Lecture Notes - Lecture 11: Oligopoly, Best Response, Profit Maximization

Department
Economics for Management Studies
Course Code
MGEA02H3
Professor
Gordon Cleveland
Lecture
11

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Oligopoly is a market in which there
are only a few sellers.
How many?
So few that they feel the eects of
each other’s decisions…the prots of
each rm will depend on the strategy
followed by its competitors
(cigarette companies, the banks, oil
producers, steel producers, car
companies, insurance companies,
cereal producers, electronics, etc)
How shall we model this type of
industry?

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First, simplify…assume there are
only two rms in industry…with entry
blocked.
e.g., Suppose we have two rms
competing in a given market,
producing identical output
(homogeneous, standardized product).
The decision each rm has to make is:
How much output should I try to
sell, given what I think the other
producer might try to sell?”
Firm #1 decides on q1
Firm #2 decides on q2
How do their strategies interact?
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For simplicity, assume each rm
has MC = AC = \$2, no matter how
much they produce (that is, TC1 = 2q1
andTC2 = 2q2)
TC1 = 2q1and TC2 = 2q2
P = 14 - QT
(Industry Demand Curve)
QT or Q = q1 + q2
For example, if rm #1 chooses q1 = 2
then if q2 = 2, so Q = and P =
or if q2 = 3, then Q = and P =
or if q2 = 4, then Q = and P =