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Lecture 4

Economics 2261A/B Lecture Notes - Lecture 4: Best Response, Marginal Revenue, Pepsis


Department
Economics
Course Code
ECON 2261A/B
Professor
Vandna Bhatia
Lecture
4

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Ch. 13 – Imperfect Competition 2
Oligopoly HOMOGENEOUS product models
1. Cournot duopoly and N-opoly
2. Shared Monopoly (Cartel)
3. Bertrand – price competition
4. Stackleberg – sequential
5. Dominant Firm with competitive fringe
Stackelberg Model
1. Sequential
2. homogeneous products
3. Q setting
Cournot assumed that each firm chose Q (capacity) simultaneously, but it may be more realistic
to think of one firm choosing Q (capacity) first with other firms following after the leader.
The leader maxes profit from a residual demand curve where firm 2 is responding as a Cournot
duopolist.
Assume
1. Firm 1 is leader knowing that firm 2 will choose Q like a Cournot duopolist
2. Firm 2 is follower.
From previous examples, we will also assume
1. Market Demand P=a – bQ
2. MC=0

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Also, you could solve for the profit maximizing Q by simply maximizing the profit
equation. Profiti = TR – TC = (P x Qi) – 0. Take derivative of profit wrt Q and set =0.

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Conclusions:
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