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Lecture 7

Lecture 7.docx


Department
Economics for Management Studies
Course Code
MGEC40H3
Professor
Jack Parkinson
Lecture
7

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MGEC40 Lecture 7
Reminders:
- Next Monday is a holiday; no class
Review From Last Class
- PC  P=MC
- Monopoly  P > MC
- Oligopoly  Cournot and Bertrand
- Monopolistic Competition  Hotelling Model
- Oligopoly  Competition among the few; a story of strategic interaction
When quantities go up, prices go down. So firms try to reduce quantity in order to protect
themselves from earning less profit (best response curve)
Nash equilibrium is where the two best response curves meet
oHow many players? More than 2
oWhat are they picking?
oSimultaneous order of play
oComplete & symmetric information
oPerfect substitutes
oSame costs and technology
The only way to do better is to alter the nature of the game (above things, such as
product differentiation, having better technology, or changing the number of firms)
Let’s assume we alter the number of firms…
oIncreased number of firms: you get more competition and it rises towards perfect
competition
oLowered number of firms: such as forming a cartel; you behave like a monopoly
and you get monopoly profits (by the way, cartels are illegal and unstable)
Bertrand Model
We learned last week that for a monopoly, price always equals quantity
Bertrand is picking price; Courtnot is pricking quantity
Last week we used the example:
oP=100-Q
oMC1=AC1-10=MC2=AC2
oThe strategic interaction:
Firm 1 needs to guess what the Firm 2 charges.
Assume that you guess Firm 2 charges $20. How much are you going to
charge? Less than $20 because consumers will buy from whoever is
charging the lowest price, if the good is identical. You should charge
$19.99 (the least difference possible)
This will keep going in between firms until the price goes down to MC
So both firms will end up yelling out $10 because neither firm will be able
to go below MC
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