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Explore the concept of non-cooperative oligopoly with Cournot equilibrium and Bertrand equilibrium. Analyze firm behaviors in competitive markets. Learn from real-world examples and economic theory.
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Non-Cooperative Oligopoly • “Few” Firms • Product Types • Identical Chapter 6 • Heterogeneous Chapter 7 • No Entry • Firms pick price or quantity only This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Non-Cooperative Game Theory • 2 or more players maximizing individual payoffs • Each firm is aware of the other’s decision and the way those decisions affect proft. • Nash Equilibrium • Cournot Equilibrium: Nash in quantity choice • Bertrand Equilibrium: Nash in price choice This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Cournot Equilibrium • No entry • Homogeneous products • Single period • Demand Example: Q = 1000-1000p • Cost of firm I = .28*qi (i = 1,2) This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Figure 6.1 P $1 MC = $.28 Residual Demand: q1 = 1000-1000P - 240 Market Demand: Q = 1000-1000P Output 480 760 1000 240 Residual Marginal Revenue This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Reaction functions are also called: Best Response Functions Finding Firm 1’s best response This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Finding Firm 2’s best response This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Graphing the Reaction Functions This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Calculating Cournot Equilibrium This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Cournot Vs. Monopoly • For our example Demand: Q = 1000-1000pCost = .28*q This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Cournot Vs. Competition • For our example Demand: Q = 1000-1000PSupply: P = .28 This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Figure 6.3 Profit Possibility Frontier Cournot 57.6 32.4 Stackleberg 57.6 64.8 Efficient Point, Bertrand This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Cournot with n-firms • Firm’s output = 720/(n+1) • Industry output = 720n/(n+1) • Price = 1/n + .28 • Profit of firm = 5.184/(n+1)2 This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Bertrand Equilibrium • For our example Demand: Q = 1000-1000pCost = .28*q • What is demand for firm 1? This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Stackleberg Leader-Follower This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Stackleberg Calculations • Maximize Firm 1’s profit given that firm 2 will follow the rule: q2=360 – q1/2. This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Multi-period Game Complexities • Simultaneous move games • Single period • Super games • Finitely repeated games • Sub-game perfection This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Cournot: One Period vs Supergame Firm 1 240 180 $54.00 $57.6 240 $57.6 $72.00 Firm 2 $72.00 $64.80 180 $54.00 $64.80 This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Experimental Evidence • Plott (1982) • Cournot, Competitive Equilibrium, and joint profit maximum predict price well • Which is better depends on exact setup • Lave (1962) • 2 period, 2 person, multi-period prisoner’s dilemma, no formal communication: joint profit maximum best predictor. • Holt (1985) • Tri-opoly, repeated 25 times: Outcome between Cournot and Joint profit maximum • Tri-opoly, one-shot only: Cournot Outcome closest This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
