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Intermediate Economics Chapter Nineteen Notes

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ECON 2310
Johanna Goertz

Chapter Nineteen 191193198Oligopoly y Oligopoly and Game Theory o Game theory extends this idea by looking for price or quantity choices at which each firm is doing as well as it can given the prices charged or quantities produced by its rivalso In a nash equilibrium of an oligopoly market each firm is making a profit maximizing choice given the choices of its rivalso In game theory a firms most profitable choice given the actions of its rivals is called its best responseo A fundamental problem facing oligopolists is that each cares only about its own profit and ignores the effects of its actions on rivals profits Because each has an incentive to lower its price or increase its quantity to expand its sales joint profits in the nash equilibrium are lower than they would be if the firms colluded and acted like a monopolisty The Bertrand Model Price Competition with Homogeneous Products o A market with two sellers is called a duopolyo In a market for homogeneous goods firms sell identical productso In the Bertrand model of oligopoly firms produce homogeneous products and set their prices simultaneouslyo If both firms charge the same price each firm will sell to half the market at that priceo
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