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Imperfect Competition Part II

This slide explain about Imperfect Competition. this slide is divided into five parts. this is the second part.

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Imperfect Competition Part II

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  1. Chapter 11 Imperfect Competition (Part II) © 2004 Thomson Learning/South-Western

  2. APPLICATION 11.1: The De Beers Cartel • The Glamour of D Beers • De Beers controls most print and television advertising, including “Diamonds Are Forever”. • They convinced Japanese couples to adopt the western habit of buying engagement rings. • De Beers has attempted to generate a brand name with customers to get consumers to judge De Beers diamonds superior to other suppliers.

  3. The Cournot Model • The Cournot model of duopoly is one in which each firm assumes the other firm;s output will not change if it changes its own output level. • Assume • A single owner of a costless spring. • A downward sloping demand curve for water has the equation Q = 120 - P.

  4. The Cournot Model • As shown in Figure 11.2, the monpolist would maximize profit by producing Q = 60 with a price = $60 and profits (revenue) = $3600. • Note, this output equals one-half of the quantity that would be demanded at a price of zero. • Assume a second spring is discovered.

  5. FIGURE 11.2: Spring Monopolist’s Output Choice Price 120 60 MR D Output per week 0 60 120

  6. Duopoly Model • Cournot assumed that firm A, say, chooses its output level (qA) assuming the output of firm B (qB) is fixed and will not adjust to A’s actions. • The total market output is given by

  7. Duopoly Model • If the demand curve is linear, the marginal revenue curve will bisect the horizontal axis between the price axis and the demand curve. • Thus, the profit maximizing point is given by

  8. Duopoly Model • If firm B chooses to produce 60 units, firm A would choose 30 [=(120 - 60)  2]. • Equation 11.4 is called a reaction function which, in the Cournot model, is a function or graph that shows how much one firm will produce given what the other firm produces.

  9. FIGURE 11.3: Cournot Reaction Functions in a Duopoly Market 120 Output of firm B(qB) Firm A’s reactions Output of firm A(qA) 0 60 120

  10. Duopoly Model • Firm A’s reaction function is shown in Figure 11.3. • Firm B’s reaction function is given below and also shown in Figure 11.3

  11. FIGURE 11.3: Cournot Reaction Functions in a Duopoly Market 120 Output of firm B(qB) Firm A’s reactions 60 Equilibrium Firm B’s reactions Output of firm A(qA) 0 60 120

  12. Cournot Equilibrium • The actions of the two firms are consistent with each other only at the point where the two lines intersect. • The point of intersection is the Cournot equilibrium, a solution to the Cournot model in which each firm makes the correct assumption about what the other firm will produce.

  13. FIGURE 11.3: Cournot Reaction Functions in a Duopoly Market 120 Output of firm B(qB) Firm A’s reactions 60 Equilibrium 40 Firm B’s reactions Output of firm A(qA) 0 40 60 120

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