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Oligopoly

Oligopoly. Structure. Assume. Duopoly. Firms know information about market demand. Perfect Information. Strategy. Simultaneous Movement. Non - Cooperative. Quantity. Cournot Model. Price. Bertrand Model. Cartel. Cooperative. Strategy. Sequential Movement. Price.

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Oligopoly

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  1. Oligopoly

  2. Structure Assume Duopoly Firms know information about market demand Perfect Information

  3. Strategy Simultaneous Movement Non - Cooperative Quantity Cournot Model Price Bertrand Model Cartel Cooperative

  4. Strategy Sequential Movement Price Price Leadership Model Quantity Stackelberg Model

  5. Cournot Model Assume Homogeneous goods Given other Firm quantity is constant, and choose my quantity Simultaneous Decision Each firm want to maximize profit Quantity Taker

  6. Firm A Quantity 20 is best respond when B produce 50 Units B = 50 20 DM MR50 D50 20 30 80 P MCA Q

  7. Firm A Quantity 35 is best respond when B produce 20 Units B = 20 MR20 D20 MCA DM 35 P Q

  8. B output Cournot Reaction Curve Firm A reaction curve Cournot Equilibrium Firm B reaction curve A output

  9. P P Firm A Firm B A = 30 B = 30 MC MC D30 D30 DM DM MR30 MR30 Q Q 30 30 Firm A’ s output is a best respond to firm B’ s output. Firm B’ s output is a best respond to firm A’ s output.

  10. Linear Demand and Zero Marginal Cost Firm 1 Firm 2

  11. Demand : P = 100 – Q ; Q = Q1 + Q2 Marginal Cost : MC1 = MC2 = 10 Firm 1 TR = PQ1 = ( 100 – Q1 – Q2 )Q1 = 100Q1 – Q12– Q2Q1 MR = 100 – 2Q1 – Q2

  12. Firm 1 MR = 100 – 2Q1 – Q2 = MC MR = 100 – 2Q1 – Q2 = 10 Reaction Curve of Firm 1

  13. Q2 0 50 75 90 MR = 100 – 2Q1-Q2 100 – 2Q1 50 – 2Q1 25 – 2Q1 10 – 2Q1 Q1 45 20 7.5 0

  14. P D1( 50 ) D1( 0 ) MR1( 0 ) MC Q1 20 45

  15. Demand : P = 30 – Q ; Q = Q1 + Q2 Marginal Cost : MC1 = MC2 = 0 Oligopoly ( 2 Firms ) Competitive Market Cartel ( 2 Firms )

  16. Q2 Firm 1 ’ s Reaction Curve Firm 2 ’ s Reaction Curve Q1

  17. Many Firms in Cournot Equilibrium Assume : there are n Firms

  18. Given

  19. Exercise (a) Suppose that inverse demand is given by P = a – bQ, and that firms have identical marginal cost given by C. Assume that a > C so that part of the demand curve lies above the marginal cost curve ( otherwise the industry would not produce any input ). What is the monopoly equilibrium in this market? (b) What is the perfect competitive market outcome? (c) What is the Cournot equilibrium in market with two firms? (d) Suppose the market consists of N identical firms. What is the Cournot equilibrium quantity per firm, market quantity, and price?

  20. Stackelberg Model Homogeneous Product Firm 1 moves first Firm 2 knows firm 1’ s output, and decide his output Firm 1 sets output by reaction function of firm 2

  21. Follower’s Problem Assume MCF = 0 Contract Isoprofit

  22. QF Isoprofit line for firm 2 F2 (QL*) Reaction Curve for firm F QL QL*

  23. Leader’s Problem Assume MCL = 0 S.t.

  24. QF Firm 1 F2 (QL*) QL QL*

  25. Exercise Demand : P = 30 – Q ; Q = Q1 + Q2 Marginal Cost : MC1 = MC2 = 0 Firm 1 Move First Exercise Demand : P = 100 – Q ; Q = Q1 + Q2 Marginal Cost : ACi = MC1 = MC2 = 10

  26. Bertrand Model ( Price Competition ) Price of other firm is constant and Simultaneous Movement MC = MR Case 1 : Homogeneous Product Demand : P = 100 – Q ; Q = Q1 + Q2 Marginal Cost : MC1 = MC2 = 10 Demand : P = 30 – Q ; Q = Q1 + Q2 Marginal Cost : MC1 = MC2 = 3

  27. P2 0 8 16 Demand 6 – 0.5Q1 10 – 0.5Q1 14 – 0.5Q1 P1 3 5 7 Case 2 : Differentiated Product Firm 1 ‘s Demand : Q1 = 12 – 2P1 + P2 Firm 2 ‘s Demand : Q2 = 12 – 2P2 + P1 Fixed Cost = 20 and MC1 = MC2 = 0

  28. P2 Firm 2’s Reaction Curve Firm 1’s Reaction Curve P1 o

  29. Homogeneous Product Leader ( MC lower ) will set price first Follower ( MC higher ) will set price follow Leader Price Leadership Model

  30. P MCF DM P1 A DL C B D PL MCL Q 0 QF QL MRL QT

  31. P P MCi Total MC ACi PM S E Pe MR D Q Q QF* Q2 QM Maximization profit of Cartel Cartel Same MC Structure ( for Simple )

  32. Assume Cost = o

  33. Q2 Firm 2 a/2b Q1 a/2b

  34. Punishment Strategy “If you stay at the production level that maximize joint industry project, fine. But if I discover you cheating by producing more than this amount, I will punish you by producing the Cournot level for output forever.” Cartel Behavior Defect Behavior

  35. Keep Cartel Behavior

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