![Page 1: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/1.jpg)
1
Oligopoly
Johan Stennek
![Page 2: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/2.jpg)
2
Oligopoly
• Example:Zocord– Reducescholesterol– ProducedbyMerck&Co
– PatentexpiredinApril2003(inSweden)– Othercompaniesstartedtosellperfectcopies
(=containingexactlythesameacIveingredientSimvastaIn)
![Page 3: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/3.jpg)
Examples
3
PriceofZocordinSweden
Nominalpriceperdailydose(SEK)
![Page 4: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/4.jpg)
4
Oligopoly
• QuesIon– HowdoescompeIIonwork?– Howstrongisit?– Howdoesthatdependonthemarket?
• Comparemonopolyandduopoly– Givenmarket(technology,demand)– Q:Howdoespricedependon#firms?
![Page 5: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/5.jpg)
Aduopolymodel(Bertrand)
![Page 6: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/6.jpg)
6
Duopoly
• Timing
1. Firmssetpricessimultaneously
2. Consumersdecidehowmuchtobuyandfromwhom
NB:FirmshavenoImetoreact!
![Page 7: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/7.jpg)
7
Duopoly
• Technology– Constantmarginalcost– Firmshavesamemarginalcost
• Demand– Marketdemand:Linear(example)– Firms’goodshomogenous
![Page 8: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/8.jpg)
8
Duopoly
• Consumerbehavior
– Allbuyfromcheapestfirm
– Ifsameprice:50-50split
![Page 9: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/9.jpg)
9
DuopolyResidualdemand
Marketdemand:D(p)
![Page 10: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/10.jpg)
10
DuopolyResidualdemand
Competitors price
Marketdemand:D(p)
![Page 11: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/11.jpg)
11
DuopolyResidualdemand
Competitors price
Marketdemand:D(p)
●
Residualdemand:Di(p1,p2)
![Page 12: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/12.jpg)
12
Duopoly
Profits
π i p1, p2( ) = pi − c( )Di p1, p2( )
where
D1 p1, p2( ) =
D p1( ) p1 < p212D p1( ) if p1 = p2
0 p1 > p2
#
$
%%
&
%%
![Page 13: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/13.jpg)
13
DuopolyGameTheory
• Inter-dependentdecisions– Firm1’sopImalpricedependsonfirm2’sprice
– Firm2’sopImalpricedependsonfirm1’sprice
• Howtoanalyze– Cannotsimplyassumeprofitmaximizingbehavior
– Gametheory
![Page 14: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/14.jpg)
14
DuopolyGameTheory
• Gameinnormalform– Q:Elementsofagameinnormalform?
• Players,Strategies,Payoffs– Players
• Firm1andFirm2
– Strategies• Eachfirmchoosesapricepi(arealnumber)• Recall:Strategyprofile=Apriceforeachplayer(p1,p2)
– Payoffs• Profits• Recall:PayofffuncIonassignsapayoffforeverypossiblestrategyprofile,πi(p1,p2)
![Page 15: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/15.jpg)
15
DuopolyGameTheory
• Nashequilibrium– “Acommonunderstandingamongallplayersofhowtheyareallgoingtobehave”
– Astrategyprofilesuchthatnoplayercanincreaseitspayoffgiventhatallotherplayersfollowtheirstrategies
![Page 16: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/16.jpg)
16
DuopolyGameTheory
• Nashequilibriuminduopolygame
– Apairofprices(p1,p2)suchthat
• π1(p1,p2)≥π1(p’1,p2)forallp’1
• π2(p1,p2)≥π2(p1,p’2)forallp’2
![Page 17: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/17.jpg)
17
DuopolyIntuiIveAnalysis
qm
pm
qm/2
• Q: Will the two firms charge pm?
– Eachwouldsellqm/2
– Eachwouldearnπm/2
![Page 18: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/18.jpg)
• What if a firm undercuts to pm – ε?
– Itwouldsell≈qm
– Itwouldearn≈πm
• Conclusion
– Small reduction in price è Massiveexpansionofsales
– pm not reasonable prediction
18
qm
pm
qm/2
DuopolyIntuiIveAnalysis
![Page 19: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/19.jpg)
19
Q:Whatifbothchargep=c?- qi=q*/2- πi=0
p=c
q*q*/2
DuopolyIntuiIveAnalysis
![Page 20: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/20.jpg)
20
Nounilateralchangeprofitable?-Higherprice→q=0,π=0- Lowerprice→q>0,p<c,π<0
p=c
q*q*/2
DuopolyIntuiIveAnalysis
![Page 21: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/21.jpg)
21
• Ifbothfirmschargep=c
– NoincenIvetochangebehavior
– ReasonablepredicIon
– Nashequilibrium
DuopolyIntuiIveAnalysis
![Page 22: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/22.jpg)
22
• Twoformalproofs
– Foreverypossibleoutcome,invesIgateifsomeonehasincenIvetodeviate
– Bestreplyanalysis
Duopoly
![Page 23: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/23.jpg)
23
Duopoly
Candidate Profitable deviation
p1 > p2 > c who? what?
![Page 24: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/24.jpg)
24
Duopoly
Candidate Profitable deviation
p1 > p2 > c Firm i pi = pj – ε (max pm)
![Page 25: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/25.jpg)
25
Duopoly
Candidate Profitable deviation
p1 > p2 > c Firm i pi = pj – ε (max pm)
p1 = p2 > c who? what?
![Page 26: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/26.jpg)
26
Duopoly
Candidate Profitable deviation
p1 > p2 > c Firm i pi = pj – ε (max pm)
p1 = p2 > c Firm i pi = pj – ε (max pm)
![Page 27: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/27.jpg)
27
Duopoly
Candidate Profitable deviation
p1 > p2 > c Firm i pi = pj – ε (max pm)
p1 = p2 > c Firm i pi = pj – ε (max pm)
p1 > p2 = c who? what?
![Page 28: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/28.jpg)
28
Duopoly
Candidate Profitable deviation
p1 > p2 > c Firm i pi = pj – ε (max pm)
p1 = p2 > c Firm i pi = pj – ε (max pm)
p1 > p2 = c Firm 2 p2 = p1 – ε (max pm)
![Page 29: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/29.jpg)
29
Duopoly
Candidate Profitable deviation
p1 > p2 > c Firm i pi = pj – ε (max pm)
p1 = p2 > c Firm i pi = pj – ε (max pm)
p1 > p2 = c Firm 2 p2 = p1 – ε (max pm)
p1 = p2 = c who? what?
![Page 30: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/30.jpg)
30
Duopoly
Candidate Profitable deviation
p1 > p2 > c Firm i pi = pj – ε (max pm)
p1 = p2 > c Firm i pi = pj – ε (max pm)
p1 > p2 = c Firm 2 p2 = p1 – ε (max pm)
p1 = p2 = c - -
![Page 31: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/31.jpg)
31
DuopolyBest-replyanalysis
![Page 32: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/32.jpg)
32
DuopolyBest-replyanalysis
p2
p1
p2=p1
c
c
pm
pm
Setofallstrategyprofiles
![Page 33: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/33.jpg)
33
DuopolyBest-replyanalysis
p2
p1
p2=p1
c
c
pm
pm
Q:Whatdowemeanby“firm2’sbestreplyfuncIon”?A:Profitmaximizingp2foreverypossiblep1
![Page 34: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/34.jpg)
34
DuopolyBest-replyanalysis
p2
p1
p2=p1
c
c
pm
pm
Q:Whatdowemeanby“firm2’sbestreplyfuncIon”?A:Profitmaximizingp2foreverypossiblep1
![Page 35: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/35.jpg)
35
DuopolyBest-replyanalysis
p2
p1
p2=p1
c
c
pm
pm
Whatifp1>pm
![Page 36: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/36.jpg)
36
DuopolyBest-replyanalysis
p2
p1
p2=p1
c
c
pm
pm
Firm2’sbestreply
![Page 37: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/37.jpg)
37
DuopolyBest-replyanalysis
p2
p1
p2=p1
c
c
pm
pm
Firm2’sbestreply
Whatifc<p1≤pm
![Page 38: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/38.jpg)
38
DuopolyBest-replyanalysis
p2
p1
p2=p1
c
c
pm
pm
Firm2’sbestreply
![Page 39: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/39.jpg)
39
DuopolyBest-replyanalysis
p2
p1
p2=p1
c
c
pm
pm
Firm2’sbestreply
Whatifp1=c
![Page 40: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/40.jpg)
40
DuopolyBest-replyanalysis
p2
p1
p2=p1
c
c
pm
pm
Firm2’sbestreply
![Page 41: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/41.jpg)
41
DuopolyBest-replyanalysis
p2
p1
p2=p1
c
c
pm
pm
Firm2’sbestreply
Whatifp1<c
![Page 42: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/42.jpg)
42
DuopolyBest-replyanalysis
p2
p1
p2=p1
c
c
pm
pm
Firm2’sbestreply
![Page 43: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/43.jpg)
43
DuopolyBest-replyanalysis
p2
p1
p2=p1
c
c
pm
pm
Firm2’sbestreply
SelecIon
![Page 44: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/44.jpg)
44
Duopoly
p2
p1
p2=p1
c
c
pm
pm
Firm1’sbestreply
![Page 45: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/45.jpg)
45
Duopoly
p2
p1
p2=p1
c
c
pm
pm
Firm2’sbestreply
Firm1’sbestreply
NashequilibriumA(p1,p2)thatliesonbothbestreplyfuncIons
![Page 46: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/46.jpg)
WhatispricecompeIIon?Comparemonopolyandduopoly
![Page 47: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/47.jpg)
47
WhatispricecompeIIon?
• PredicIon– MorefirmsèLowerprices
• IsthispredicIontrue?
![Page 48: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/48.jpg)
48
WhatispricecompeIIon?
• ExtremepredicIon(“Bertrandparadox”)– 2firms=>p=c&π=0
• Q:ReasonforextremepredicIon?– Reducepriceonecent,getallcustomers
– AlwaysprofitabletoreducepricebelowcompeItor,aslongasp>c.
![Page 49: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/49.jpg)
49
WhatispricecompeIIon?
• Moreooen
– Morefirms:p>c&π>0
– Reason:Don’tgetallcustomers
– Examples: ProductdifferenIaIon
![Page 50: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/50.jpg)
WhatispricecompeIIon?
• EsImatedLernerindexes(mark-ups)inautomobiles
• Conclusion
• CompeIIondoesnoteliminateallmarkups• Also
• 3rddegreepricediscriminaIonalsowithcompeIIon• Highmarkupsinhomecountries
50
Model Belgium France Germany Italy UK
FiatUno 7.6 8.7 9.8 21.7 8.7
FordEscort 8.5 9.5 8.9 8.9 11.5
Peugeot 9.9 13.4 10.2 9.9 11.6
Mercedes 14.3 14.4 17.2 15.6 12.3
![Page 51: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/51.jpg)
51
WhatispricecompeIIon?
• TheoreIcallyrobust– ManyothermodelsofoligopolygivesamequalitaIvepredicIon
• Empirically“confirmed”– ManyempiricalstudiessuggestthatcompeIIonleadstolowerprices
![Page 52: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/52.jpg)
52
DoesCompeIIonMawer?
Consumersurplus
p=c
q*
DWL
qm
pm
Profit
Consumersurplus
Duopoly Monopoly
![Page 53: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/53.jpg)
53
Sourcesofmarketpower1. Fewfirms&Entrybarriers2. ProductdifferenIaIon:horizontal&verIcal
3. QuanItycompeIIon/Capacityconstraints
4. Costadvantage5. Uninformedcustomers
6. Customerswitchingcosts
7. PricediscriminaIon:informaIon&arbitrage
8. CartelizaIon
![Page 54: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/54.jpg)
EconomicMethodology• Economicmodel=Animaginaryeconomy
– Includekeyfeaturesforissuesathand– RemoveallcomplicaIons(egcompeIIon)– AddfeaturessequenIally(egcompeIIon)
• Pros– Easytoseeprinciples– Candoexperiments(egWhatistheeffectofcompeIIon)
• Cons– Notthefullpicture– AreconclusionstrueorarIfacts?
54
![Page 55: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/55.jpg)
CournotModel(AlternaIvetoBertrand)
![Page 56: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/56.jpg)
56
QuanItyCompeIIon
• Bertrandmodel– Firmssetprices– ConsumersdecidequanIIes(firmsmustdeliver)
• Cournotmodel– FirmschosequanIIes– Thenpriceissettoclearthemarket
• Note1:Differencemawers(contrasttomonopoly)
• Note2:TwodifferentinterpretaIons
![Page 57: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/57.jpg)
57
QuanItyCompeIIon• FirstinterpretaIon
– Stage1:Firmsproduce:q1,q2– Stage2:FirmsbringproducetoaucIon:p=P(q1+q2)
• Example– Fishingvillage
• Note– Pricingdecisionisdelegated– Butequilibriumpriceaffectedbyamountproduced– Weomittheissuewhyp=P(q1+q2)
![Page 58: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/58.jpg)
58
QuanItyCompeIIon
• SecondinterpretaIon:Two-stagegame– Stage1:FirmschosecapaciIes:k1,k2
– Stage2:Firmssetprices:p1,p2
• Note:– UndersomecondiIonsp1=p2=P(k1+k2)
– Thenstudychoiceofcapacity(=quanIty)
![Page 59: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/59.jpg)
59
DuopolyGameTheory
• Gameinnormalform– Q:Elementsofagameinnormalform?
• Players,Strategies,Payoffs– Players
• Firm1andFirm2
– Strategies• EachfirmchoosesaquanItyqi(arealnumber)• Recall:Strategyprofile=AquanItyforeachplayer(q1,q2)
– Payoffs• Profits:πi(q1,q2)=P(q1+q2)・qi–C(qi)
• Recall:PayofffuncIonassignsapayoffforeverypossiblestrategyprofile,πi(p1,p2)
![Page 60: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/60.jpg)
60
ExogenouscondiIons
• Simplify1:Technology– Constantmarginalcost– Firmshavesamemarginalcost
• Simplify2:Demand– Firms’goodshomogenous– Marketdemand:Linear
![Page 61: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/61.jpg)
61
CournotDuopoly
• Technology– Constantmarginalcosts,c
• Demand(linear)– Individualdemand: q=a–p– Numberofconsumers: m– Marketdemand: Q=m*(a–p)
![Page 62: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/62.jpg)
62
CournotDuopoly
• Exercise:– Solvethemodel
• Steps:1. SetupprofitfuncIons2. Findbest-replyfuncIons3. FindequilibriumquanIIes4. Findequilibriumprice
![Page 63: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/63.jpg)
63
Definethegame
Profitπ1 q1,q2( ) = P q1 + q2( ) ⋅q1 −C q1( )
Rewrite
π1 q1,q2( ) = a − 1m ⋅ q1 + q2( )− c( ) ⋅q1
DemandQ p( ) = m ⋅ a − p( )
Indirect demandp = a − 1
m ⋅ q1 + q2( )
![Page 64: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/64.jpg)
64
Derivebest-replyfuncIonsProfitπ1 q1,q2( ) = P q1 + q2( ) ⋅q1 −C q1( )
Rewrite
π1 q1,q2( ) = a − 1m ⋅ q1 + q2( )− c( ) ⋅q1
FOC∂π1 q1,q2( )
∂q1
= a − 1m ⋅ q1 + q2( )− c( )− 1
m ⋅q1 = 0
Solve for best reply function
q1 =m ⋅ a − c( )
2− 1
2⋅q2
![Page 65: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/65.jpg)
65
Derivebest-replyfuncIonsq1
q2
a − c( ) ⋅m2
Firm 1's best-reply function
q1 =a − c( ) ⋅m
2− 1
2⋅q2
![Page 66: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/66.jpg)
66
Derivebest-replyfuncIonsq1
q2
a − c( ) ⋅m2
Firm 1's best-reply function
q1 =a − c( ) ⋅m
2− 1
2q2
Firm 2's best-reply function
q2 =a − c( ) ⋅m
2− 1
2q1
a − c( ) ⋅m2
![Page 67: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/67.jpg)
67
ComputeequilibriumquanIIesq1
q2
q1*
q2*
![Page 68: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/68.jpg)
68
ComputeequilibriumquanIIesEquilibrium
q1 =a − c( ) ⋅m
2− 1
2⋅q2
q2 =a − c( ) ⋅m
2− 1
2⋅q1
Find q1*
q1* =
a − c( ) ⋅m2
− 12⋅
a − c( ) ⋅m2
− 12⋅q1
*⎛⎝⎜
⎞⎠⎟
Solve for q1*
q1* =
a − c( ) ⋅m3
![Page 69: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/69.jpg)
69
ComputeequilibriumquanIIesq1
q2
q1*
q2*
Equilibrium
q1* =
a − c( ) ⋅m3
q2* =
a − c( ) ⋅m3
![Page 70: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/70.jpg)
70
Computeequilibriumprice
Equilibrium price
p* = a − 1m⋅ q1
* + q2*( )
p* = a − 1m⋅
a − c( ) ⋅m3
+a − c( ) ⋅m
3⎛⎝⎜
⎞⎠⎟
p* = a + 2 ⋅c3
![Page 71: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/71.jpg)
71
Comparewithmonopoly
Question: Effect of competition on price?
p* = a + 2 ⋅c3
pm = a + c2
Answer: Duopoly price lower
p* < pm
a + 2 ⋅c3
< a + c2
c < a
Conclusion:Morefirmsimplieslowerprices
![Page 72: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/72.jpg)
72
CompareCournot-Bertrand
Bertrand
p* = c
Cournot
p* = a + 2 ⋅c3
> c
![Page 73: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/73.jpg)
73
CompareCournot-Bertrand
• Bertrand:Cheaptostealcustomers– Lowerpricealiwle⇒Stealallconsumers
• Cournot:Expensivetostealcustomers– Tostealalotofconsumers,afirmneedstoincreaseitsproducIonalot⇒largereducIoninequilibriumprice
![Page 74: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/74.jpg)
74
CompareCournot-Bertrand
Competitors price
Marketdemand
●
Residualdemand
Competitors quantity
Marketdemand
Residualdemand
Bertrand Cournot
![Page 75: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/75.jpg)
75
CompareCournot-Bertrand
Competitors price
Marketdemand
●
Residualdemand
Competitors quantity
Marketdemand
Residualdemand
Bertrand Cournot
![Page 76: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/76.jpg)
CournotDuopoly:GraphicalSoluIon
76
![Page 77: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/77.jpg)
77
CournotDuopolyResidualDemand
Market clearing price
q1
Assume firm 2 will produce q2. How will market price vary with q1?
q2 D
![Page 78: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/78.jpg)
78
CournotDuopolyResidualDemand
Market clearing price Assume firm 2 will produce q2.
How will market price vary with q1?
q2
P(0+q2) *
D q1 0
If q1 = 0, then p = P(0+q2)
![Page 79: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/79.jpg)
79
CournotDuopolyResidualDemand
Market clearing price Assume firm 2 will produce q2.
How will market price vary with q1?
q2
P(0+q2) *
D q1 0
If q1 = q’1, then p = P(q’1+q2)
q’1 q2+q’1
P(q’1+q2) *
![Page 80: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/80.jpg)
80
CournotDuopolyResidualDemand
Market clearing price Assume firm 2 will produce q2.
How will market price vary with q1?
q2
P(0+q2) *
D q1 0
Two point on firm 1’s residual demand
q’1 q2+q’1
P(q’1+q2) *
![Page 81: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/81.jpg)
81
CournotDuopolyResidualDemand
Market clearing price Assume firm 2 will produce q2.
How will market price vary with q1?
q2
P(0+q2)
D q1 0 q’1 q2+q’1
P(q’1+q2)
D1
D1 is a parallel shift of D by q2 units
*
*
![Page 82: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/82.jpg)
82
CournotDuopolyBestReply
Market clearing price
Quantity
Assume firm 2 will produce q2. How much will firm 1 produce?
D1 D
![Page 83: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/83.jpg)
83
CournotDuopolyBestReply
Market clearing price
Quantity
Assume firm 2 will produce q2. How much will firm 1 produce?
q*1
P(q2+ q*1)
D1 D
c
![Page 84: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/84.jpg)
84
CournotDuopolyBestReply
Assume firm 2 will increases production. How will firm 1 react?
![Page 85: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/85.jpg)
85
CournotDuopolyBestReply
Market clearing price
Quantity D +Δq2 -Δq1
If Firm 2 produces more, Firm 1 produces less
![Page 86: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/86.jpg)
86
CournotDuopolyBestReply
Market clearing price
Quantity D +Δq2 -Δq1
Note: P(q1 + q2) is reduced Hence: q1 + q2 is increased Hence: q1 reduced by less than q2 increased
![Page 87: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/87.jpg)
87
CournotDuopolyBestReply
Market clearing price
Quantity
If q2 = 0 Then q1 = qm
D qm
![Page 88: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/88.jpg)
88
CournotDuopolyBestReply
Market clearing price
Quantity
If q2 = qc Then q1 = 0
D qc D1
![Page 89: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/89.jpg)
89
CournotDuopolyBestReply
q1
q2
qm
qc
q*1(0) = qm
q*1(qc) = 0
Negative slope
Less than -1
![Page 90: 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly • Queson – How does compeIIon work? – How strong is it? – How does that](https://reader031.vdocuments.site/reader031/viewer/2022021818/5aab951f7f8b9a59658c003d/html5/thumbnails/90.jpg)
90
CournotDuopolyEquilibrium
q1
q2
qm
qc qm
qc
* qn
qn
Firm 2’s best reply
Equilibrium: Both a doing their best, given what the other does
2qn
qm < 2qn < qc
q1+q2=qc