Chapter 12 Summary.docx

2 Pages

Economics (Arts)
Course Code
ECON 230D2
John C Kurien

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12.2 Oligopoly -Few firms, products may or may not be differentiated. Substantial barriers to entry (natural or strategic) -Pricing is based off of decisions, must think how changing your price will influence other firms to change their prices Nash equilibrium: each firm wants to do the best it can given what it’s competitors are doing We focus on duopolies, but everything can be applied to oligopolies Cournot Model: Two firms, market price depends on output of both firms. Each firm must decide how much to produce and make their decision at the same time. Each firm treat’s the output level of his competitor as fixed. (example of Nash equilibrium) Useless for dynamic adjustment, because it assumes prices are fixed. Firms have no opportunity to react. If only one price is given (Conference 4, Problem 1), find the price that the firm will use, and if a firm is added subtract the price from the constant in the price equation, and then calc the equilibrium quantities of the new equation (But first convert to marginal eq) Reaction curves: How much firm X will produce vs how much firm y will produce. Where they intersect is Cournot equilibrium! How to find reaction curves for firm 1. Find total revenue (In price fn use Qtotal, multiply by Q1). Find marginal revenue wrt Q1. Set Mr=MC, solve for Q1 Collusion curve: when the companies work together. Follow above steps but multiply price by Qtotal.. Firms split profit evenly. Firms should produce less but earn higher profit Perfect competition < Cournot Equilibrium < Collusion Stackelberg Model – One firm can set price first. If firm 1 decides on an output, firm 2’s profit- maximizing output is determined using the Cournot reaction curve because firm 1’s output is fixed. Firm 1 chooses Q1 so that MR=MC. But R1 depends on Q2, so firm 1 must anticipate Q2. Sub firm 2 reaction curve into MR1 and solve. -It is advantageous to set price and quantity first because if firm 2 produces a great quantity it will drive prices down and benefit no firm. 12.3 Price Competition In 12.2 we looked at quantities, now we look at prices Bertrand Model: Firms produce homogeneous good and make de
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