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Lecture 13

Economics 2151B - Lecture 13.docx

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Economics 2150A/B
Kristin Denniston

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Economics 2151B Wednesday February 26 Lecture 13 Homework 3 has been posted. • Due Wednesday March 5 • Covers chapter 13 Homogeneous Products • Industries are characterized by: 1. Quantity Competition  The Cournot Duopoly  eg. the mining industry (selling a product identical to your competitor’s product)  You set how much quantity you will produce based on what you think your competitor is producing 2. Price Setting Models (Bertrand)  Bertrand said that firms don’t compete by setting quantities, but on undercutting each other’s prices  There are two different models: a) Homogeneous product model b) Model where the products are different 3. Stackleberg Model  There is a leader in the industry and a follower  This is also a quantity setting model, but it is sequential (in the Cournot model, quantities are set simultaneously) Cournot N-opoly (under ‘quantity competition’) • What happens when more than two firms enter an oligopoly market? • N = # of firms in a Cournot industry • As the number of firms increases, the market becomes more competitive, and we approach the competitive equilibrium where P = MC • Assume: o N firms are identical o MC = 0 o Demand: P = a - bQ • Find the optimal quantity to produce for each firm. o We will start with firm 1 (firms are identical) o Demand: P = a – b(Q +1x)  x = quantity from N-1 competitors o Residual D: P = (a-bx) – bQ 1 o MR 1 (a-bx) – 2bQ o MR 1 MC i o (a-bx) – 2bQ1= 0 a−bx  Q1= 2b (the reaction function for firm 1) o Since all firms are identical, this is also the reaction function for any firm in this industry a−bx  Qi= 2b o Market:  Q = N x Q*i  X = (N-1)Q i a−b[(N−1)Qi] o Firm 1 Q 1 2b 1 a  Q1* = ( N+1 )( b ) N a N o Q = N x Q 1 = ( N+1 )( b ) as N  ∞ N+1  1 a = (1)( )  competition result b o With a smaller market, prices tend to be higher  eg. prices tend to be higher in Canada than the United States where there is more competition (more firms selling in the market)  As more firms enter, it a
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