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Chapter 10

Chapter 10. Strategic Price Setting. Figure 10.1. Price-Setting Game (profits in millions of dollars). Figure 10.2. Trigger Pricing. Figure 10.3. Solving for Profit-Maximizing Quantity for a Single Firm with N competitors.

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Chapter 10

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  1. Chapter 10 Strategic Price Setting

  2. Figure 10.1. Price-Setting Game (profits in millions of dollars)

  3. Figure 10.2. Trigger Pricing

  4. Figure 10.3. Solving for Profit-Maximizing Quantity for a Single Firm with N competitors • Model Setup: N identical firms with identical marginal cost c; market demand curve P = a – b(Q) where Q is total production by all firms. • Solve for qA*: Set marginal revenue and marginal cost equal • MR=[a-(N-1)bq]-2bqA* = c; • Use the Nash Equilibrium condition that qA* = q; all firms produce the same output. • [a-c] = 2bq+(N-1)bq = 2bq+Nbq-bq =(N+1)bq • Thus, in Cournot-Nash Equilibrium: • q = (a-c)/[b(N+1)] • The market output (output by all N firms) and market price is then • Q = Nq = [N/(N+1)][(a-c)/b] • P = a – [N/(N+1)](a-c)

  5. Figure 10.4. Cournot Price as Number of Firms Rises (a=$100; b = $1; c = $10)

  6. Figure 10.5. Cournot Realism Ratio Source: Huck, Normann, and Oechssler.

  7. Figure 10.6. Three Outcomes of Oligopolistic Competition

  8. Figure 10.7. Predatory Pricing Game (incumbent profits, competitor profits)

  9. Figure 10.8. Advertising Game (profits in billions of dollars)

  10. Figure 10.9. Beer Quality Game (profits in billions of dollars) Coors High Quality Beer Low Quality Beer High Quality Beer $10 $5 $10 $20 Budweiser $20 $15 Low Quality Beer $5 $15

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