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Lecture 11

Economics 2151B - Lecture 11.docx

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Western University
Economics 2150A/B
Kristin Denniston

Economics 2151B Wednesday February 12 Lecture 11 Chapter 13 – Oligopoly (few) and Monopolistic (many) Competition Oligopoly is characterized by: • Having a few firms • Our behaviour (price and quantity we produce) will depend on what we expect the competitor to produce (the firms are interdependent) • The firms will try to operate as a cartel o They will try to collude to achieve monopoly profits in the industry (the highest profit outcome) o There is always the incentive for one firm to cheat, so cartel behaviour doesn’t tend to last in the long run Market Type: 1. Number of firms 2. Differentiated product or homogeneous product (eg. gold) Homogeneous Product Models: 1) Cournot and Cournot N-opoly – Quantity competition (firms choose their quantity to produce based on what they think the other firm will produce) • They use this model to talk about big industries like mining where you have to make big decisions up front 2) Bertrand – Perfect competition • In this model you try to undercut the price of your competitor • If your product is not differentiated from your competitor’s product, each person will continue to cut prices until you reach a competitive outcome 3) Stackleberg – Quantity leader and follower • A firm takes the initiative and produces a quantity, and a follower takes the remainder of the market Measure Market Concentration 1. 4 Firm Concentration Ratio • Takes the top 4 firms according to market share and adds them together • 3% + 2% + 2% + 1% = 8% • When we measure market share, we are looking at the firms sales over industry sales. 2. HHI • Sums the squared market share for each firm in an industry • *Allows you to detect asymmetry in the market • The maximum you2could have is one firm produ
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