MGEC40H3 Lecture 7: Lecture 7.docx
10 Jul 2014
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Next monday is a holiday; no class. Oligopoly competition among the few; a story of strategic interaction: when quantities go up, prices go down. 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: p=100-q, mc1=ac1-10=mc2=ac2, the strategic interaction: Firm 1 needs to guess what the firm 2 charges. Assume that you guess firm 2 charges . Less than because consumers will buy from whoever is charging the lowest price, if the good is identical. This will keep going in between firms until the price goes down to mc. So both firms will end up yelling out because neither firm will be able to go below mc: best response will charge p as . Insert fig 1: the bertrand-nash equilibrium is pc, mc1=mc2= p1=p2=10 profit=profit2=o, mc1 = & mc2 = .
