Download - Oligopoly
![Page 1: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/1.jpg)
Oligopoly
![Page 2: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/2.jpg)
Structure
Assume Duopoly
Firms know information about market demand
Perfect Information
![Page 3: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/3.jpg)
Strategy
Simultaneous Movement
Cooperative
Quantity Cournot Model
Price Bertrand Model
Non - Cooperative
Cartel
![Page 4: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/4.jpg)
Strategy
Sequential Movement
Quantity Stackelberg Model
Price Price Leadership Model
![Page 5: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/5.jpg)
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
![Page 6: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/6.jpg)
DMD50MR50
80
20
B = 50
Firm A
3020
Quantity 20 is best respond when B produce 50 Units
MCA
Q
P
![Page 7: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/7.jpg)
DM
D20MR20
B = 20
Firm A
35
Quantity 35 is best respond when B produce 20 Units
MCA
Q
P
![Page 8: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/8.jpg)
A output
Cournot Equilibrium
Cournot Reaction CurveB output
Firm B reaction curve
Firm A reaction curve
![Page 9: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/9.jpg)
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.
P
QDMD30
MC
30
B = 30
Firm A
MR30
P
QDMD30
MC
30
A = 30
Firm B
MR30
![Page 10: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/10.jpg)
Linear Demand and Zero Marginal Cost
1 2P(q ,q )=a-bq 1 2q + q = q
1 2 1 2P( q , q )=a - b( q + q )
Firm 1
1 1 2 1 1 1π = (a - bq -bq )q - C (q )
Firm 2
2 1 2 2 2 2π = (a - bq -bq )q - C (q )
![Page 11: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/11.jpg)
11 2 1 1
1
π = a - 2bq -bq - MC (q ) = 0q
22 1 2 2
2
π = a - 2bq -bq - MC (q ) = 0q
21
a-bqq =2b
12
a-bqq =2b
1 2a a 2aq = , q = , q =
3b 3b 3b
![Page 12: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/12.jpg)
Demand : P = 100 – Q ; Q = Q1 + Q2
Marginal Cost : MC1 = MC2 = 10
Firm 1
TR = PQ1 = ( 100 – Q1 – Q2 )Q1
= 100Q1 – Q1
2 – Q2Q1
MR = 100 – 2Q1 – Q2
![Page 13: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/13.jpg)
Firm 1
MR = 100 – 2Q1 – Q2 = MC
MR = 100 – 2Q1 – Q2 = 10
21
90-qQ =2
Reaction Curve of Firm 1
![Page 14: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/14.jpg)
Q2 MR = 100 – 2Q1-Q2 Q1
0 100 – 2Q1 45
50 50 – 2Q1 20
75 25 – 2Q1 7.5
90 10 – 2Q1 0
![Page 15: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/15.jpg)
Q1
P
D1( 0 )MR1( 0 )
D1( 50 )
MC
4520
![Page 16: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/16.jpg)
Demand : P = 30 – Q ; Q = Q1 + Q2
Marginal Cost : MC1 = MC2 = 0
Oligopoly ( 2 Firms )
Competitive Market
Cartel ( 2 Firms )
![Page 17: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/17.jpg)
Q1
Q2
Firm 2 ’ s Reaction Curve
Firm 1 ’ s Reaction Curve
![Page 18: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/18.jpg)
Many Firms in Cournot Equilibrium
Assume : there are n Firms
1 2 nq +q ...+q = q
)MC(qqΔqΔPP(q) ii
)MC(qP(q)q
ΔqΔP1P(q) i
i
![Page 19: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/19.jpg)
)MC(qqq
P(q)q
ΔqΔP1P(q) i
i
qqS i
i Given
)MC(q(q)S1P(q) i
i
![Page 20: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/20.jpg)
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?
![Page 21: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/21.jpg)
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
![Page 22: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/22.jpg)
Follower’s Problem Assume MCF = 0
)(qC)qqP(qMax FFFFLqF
FL2FFF qbqbqaqπ
Contract Isoprofit
![Page 23: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/23.jpg)
QL
QF
QL*
F2 (QL*)
Reaction Curve for firm F
Isoprofit line for firm 2
![Page 24: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/24.jpg)
Leader’s Problem Assume MCL = 0
)(qC)qqP(qMax L1LFLqL
2bbqa)(qfq L
LFF
S.t.
FL2LLL qbqbqaqπ
![Page 25: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/25.jpg)
)2bbq-a(bqbqaqπ L
L2LLL
2LLL q
2bq
2aπ
0MCq2b
2aMR LLL
2baqL
4baqF
![Page 26: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/26.jpg)
QL
QF
QL*
F2 (QL*)
Firm 1
![Page 27: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/27.jpg)
Demand : P = 30 – Q ; Q = Q1 + Q2
Marginal Cost : MC1 = MC2 = 0
Firm 1 Move First
Exercise
Exercise
Demand : P = 100 – Q ; Q = Q1 + Q2
Marginal Cost : ACi = MC1 = MC2 = 10
![Page 28: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/28.jpg)
Bertrand Model ( Price Competition )
Price of other firm is constant and Simultaneous Movement
Case 1 : Homogeneous Product
Demand : P = 30 – Q ; Q = Q1 + Q2
Marginal Cost : MC1 = MC2 = 3
MC = MR
Demand : P = 100 – Q ; Q = Q1 + Q2
Marginal Cost : MC1 = MC2 = 10
![Page 29: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/29.jpg)
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
P2 Demand P1
0 6 – 0.5Q1 3
8 10 – 0.5Q1 5
16 14 – 0.5Q1 7
![Page 30: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/30.jpg)
Firm 1’s Reaction Curve
P1
P2 Firm 2’s Reaction Curve
o
![Page 31: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/31.jpg)
Price Leadership Model
Homogeneous Product
Leader ( MC lower ) will set price first
Follower ( MC higher ) will set price follow Leader
![Page 32: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/32.jpg)
Q
P MCFDM
DL
MRL
MCL
QL
DCB
QTQF
PL
P1A
0
![Page 33: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/33.jpg)
Cartel Maximization profit of Cartel
Same MC Structure ( for Simple )P P
Total MC
DMR
MCi
ACi
QM
EPe
PM S
QF* Q2
![Page 34: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/34.jpg)
)(qC)(qC]q)[qqP(q)q,π(q 2211212121
Assume Cost = o
)q)}(qqb(q{aπ 2121
22121 )qb(q)qa(qπ
)q2b(qaMR 21Cartel
2baqq 21
![Page 35: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/35.jpg)
Q1
Q2
a/2b
a/2b
Firm 2
![Page 36: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/36.jpg)
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.”
CournotM ππ MDefect ππ
rππ M
M Cartel Behavior
Defect Behavior
rππ Cournot
D
![Page 37: Oligopoly](https://reader034.vdocuments.us/reader034/viewer/2022051700/56816072550346895dcf9a03/html5/thumbnails/37.jpg)
rππ
rππ Cournot
DM
M
Keep Cartel Behavior
MD
CournotM*
π-ππ-πr