# The Simplest Model of Price Competition in a Duopoly: The Bertrand Model. The Symmetric Bertrand Model in a Homogenous Good Market.

Save this PDF as:

Size: px
Start display at page:

Download "The Simplest Model of Price Competition in a Duopoly: The Bertrand Model. The Symmetric Bertrand Model in a Homogenous Good Market."

## Transcription

1 OLIGOPOLY. The Simplest Model of Price Competition in a Duopoly: The Bertrand Model. The Symmetric Bertrand Model in a Homogenous Good Market. Two identical firms: 1, 2. Identical product. Constant Returns to Scale: Unit cost of production = c (for both firms). Market demand curve: D(p) downward sloping, smooth.

2 Game: Firms set their prices p 1,p 2 simultaneously. The quantity sold by each firm depends on both prices. In particular, if p 1 < p 2, then firm 1 sells the entire market demand D(p 1 ) while firm 2 sells zero. The reverse happens when p 1 >p 2. If p 1 = p 2 = p(say), theneachfirm sells 1 2 D(p).

3 Nash equilibrium: A pair of prices ( bp 1, bp 2 ) such that neither firm can do better by unilaterally deviating and charging some other price.

4 There are several possibilities: 1. A pair of prices ( bp 1, bp 2 ) where bp 1 > bp 2 >c. In this situation firm 1 earns zero profit. Firm 1 would be better off unilaterally deviating and charging a price p 1 just below bp 2. That way, it (firm 1) would make strictly positive profit. So this cannot be a NE. 2. A pair of prices ( bp 1, bp 2 ) where bp 2 > bp 1 >c: ruled out similarly.

5 3. A pair of prices ( bp 1, bp 2 ) where bp 1 = bp 2 = bp(say) >c In this case firm 1 earns profit = 1 2 D( bp)( bp c) If it unilaterally deviates a charge a price slightly below bp, its profit will be approximately (slightly below) D( bp)( bp c), almost double of what it was getting. So, this cannot be a NE.

6 4. A pair of prices ( bp 1, bp 2 ) where bp 1 > bp 2 = c. In this situation both firms earn zero profit. Firm 2 would be better off unilaterally deviating and charging a price p 2 just below bp 1 but higher than c. That way, it (firm 2) would make strictly positive profit. So this cannot be a NE. 5. A pair of prices ( bp 1, bp 2 ) where bp 2 > bp 1 = c: ruled out similarly.

7 6. A pair of prices ( bp 1, bp 2 ) where bp 1 = bp 2 = c. In this case, both firms earn zero profit. Further, no firm can deviate and do better i.e., strictly positive profit. This is a NE. It is the unique NE.

8 If firms are identical, the unique NE is one where firms set their prices = MC and the industry output is at the socially optimal level. Both firms earn zero profit. Even with two firms - market power disappears. If more than 2 firms - same outcome. Bertrand paradox.

9 Assumptions of the Bertrand: rule out certain important elements of real markets. 1. Product Differentiation: In Betrand model, firms sell identical product firms can grab all buyers from rival by charging a slightly lower price (undercutting). Real world: differentiated products consumers may not switch to another firm simply because it charges a lower price (care about difference in product attributes) incentive for a firm to undercut rival s price is much less.

10 2. Dynamic competition: Bertrand model is static (one shot game): prices chosen only once. Real world rival firms have long term interaction - repeatedly choose prices over time. Repeated games : better outcomes than in static games. Possibility of future "retaliation" (through price war) can dissuade firms from undercutting now.

11 3. Capacity Constraints: Bertrand model: firms can produce as much as they want at the same unit cost. Real world: firms have limited production capacity. Undercutting rival s price to attract more buyers is not very useful if the firm cannot produce more output to meet the increased demand.

12 Consider a simple modification of the symmetric Bertrand duopoly model where each firm has a capacity constraint. Let k 1,k 2 denote the capacity constraints of firms 1 and 2. A firm cannot sell more than its capacity. Firms produce output at constant unit cost upto their capacity. For simplicity, set unit production cost =0for both firms. Firms set prices simultaneously.

13 With capacity constraints, undercutting rival does not necessarily reduce rival s sales to zero; there may be a positive residual demand left for the rival. For example, suppose p 1 >p 2. Ideally, all consumers want to buy from firm 2. If D(p 2 ) k 2, then firm 2 sells the entire market demand D(p 2 ) and firm 1 sells zero. If, however, D(p 2 ) >k 2, then firm 2 sells k 2 which means there are consumers who want to buy from firm 2 but are turned away. Some of them may be willing to buy from firm 1 at price p 1 >p 2. So, firm 1 can sell quantity D(p 1 ) k 2

14 (or zero, if D(p 1 ) <k 2 which corresponds to a situation where none of the consumers turned away by firm 1 are willing to pay the higher price). In other words, for and price p 1 >p 2, the residual market demand curve facing firm 1 is D(p 1 ) k 2 i.e., a horizontal left-ward shift of the market demand curve by an amount of k 2.

15 Consider a situation where the total industry capacity k 1 + k 2 is "small" relative to market demand. Let p be the price at which market demand is exactly equal to k 1 + k 2 D(p) =k 1 + k 2 What are the NE prices?

16 If k 1 + k 2 is small enough relative to market demand, NE: p 1 = p 2 = p. Why?

17 Suppose firm 2 charges p. If firm 1 charges p 1 =p, its profit (= revenue, here) is pk 1. If it charges p 1 <p, it sells the same quantity = its capacity k 1 (though consumers are willing to buy more). Selling same quantity at lower price can never increase profit.

18 If it charges p 1 >p, then we have situation where p 1 > p 2 and as discussed above, the residual market demand facing firm 1 is D(p 1 ) k 2. Check diagrammetically, that if k 1 + k 2 is "small" relative to market demand, then the marginal revenue curve corresponding to this residual market demand is strictly positive. MR > 0 implies total revenue (= profit, here) increases if output is increased. In other words, firm 1 cannot gain by increasing price above p. This proves that firm 1 s best response to p 2 = p, isto charge p 1 = p. Vice-versa. Thus, p 1 = p 2 = p is a NE.

19 Note that if k 1 +k 2 is small, p is large and so firms have a lot of market power (price is considerably higher than MC =0). Firms 1 and 2 make profit equaltok 1 p and k 2 p respectively.

20 What if k 1 + k 2 is large relative to market demand? If firms split the market by charging equal prices, their capacity is not fully utilized. So, each firm undercuts rival to gain consumers. Get back the Bertrand outcome.

21 Conclusion: More severe the capacity constraints, less competitive the market and higher the extent of market power. Industries with large capacity behave very competitively.

22 An Example of Price Competition with Capacity Constraints. Market Demand: q =100 p The inverse demand p =100 q There are two firms. Each with capacity constraint = 20 (i.e., k 1 = k 2 =20). For simplicity assume that both firms have zero unit cost of production. Firms set prices simultaneously.

23 Claim: p 1 = p 2 =\$60is a Nash Equilibrium. Note 60 is the price at which market demand is just sufficient to meet the industry output when both firms produce at full capacity. WhyisthisaNE?

24 Suppose firm 2 charges p 2 =\$60. If firm 1 charges p 1 =\$60, the two firms split the market equally and each firm sells 20 units leading to a profit of \$1200 for the firm. If firm 1 charges p 1 < \$60, it is the lower priced firm, it faces demand of more than 40 units but can only sell 20 units. Its profit is20p 1 < \$1200.

25 If firm 1 charges p 1 > \$60, it is the higher priced firm. Allconsumersgotobuyfromfirm 2 at price \$60 & their demand is 40 units. But firm 2 can only sell 20 units.

26 In order to figure out how many units will be bought from firm 1, we look at the residual market demand after 20 units are sold by firm 2. This is given by q = (100 p) 20 = 80 p demand. Firm 1 is like a monopolist facing this residual From our discussion of elasticity of demand recall that for a straight line demand curve of this kind, price elasticity of demand is greater than 1 at all points above the midpoint (and MR > 0). The midpoint of this (residual) demand curve (40, 40). So definitely at any price above \$60, demand is elastic. This means firm can increase total revenue by reducing price.

27 Therefore, raising p 1 above \$60 cannot be more profitable (remember, here total revenue = profit). Conclusion: p 1 = \$60 is a best response to p 2 =\$60. Similarly, the converse holds true. Therefore, p 1 = p 2 =\$60is a Nash Equilibrium.

28 Cournot Model of Quantity Competition. Previous analysis: If production capacity is limited, then firms will set prices at a level such that the market demand exactly equals the total production capacity. In the story so far: capacity is exogenously fixed. But what levels of capacity will competing firms choose? Higher the capacity, more intense the price competition and smaller the price eventually charged in the market. Need a model of endogenous capacity choice Cournot oligopoly model. In the Cournot model, firms choose their levels of output (or equivalently, their capacity to produce output) and it is assumed that the price at which they sell is one at which market demand equals industry output (or, industry capacity).

29 Simple Symmetric Cournot Duopoly Model: Two identical firms, i =1, 2. Both firms produce at constant unit cost c 0. Market demand: D(p) Inverse demand: P (q) Note P (q) gives us the demand price corresponding to total quantity q.

30 Strategies of firms: output q 1,q 2.(interpret as capacity) Industry output: q 1 + q 2 Then, the price in the "market" is P (q 1 + q 2 ) Profit of firm 1 (its payoff): π 1 (q 1,q 2 )=q 1 P (q 1 + q 2 ) cq 1 Profit of firm 2 (its payoff): π 2 (q 1,q 2 )=q 2 P (q 1 + q 2 ) cq 2

31 Note that each firms s profit depends on both its output as well as its rival s output (through the inverse market demand function that determines the price). Other things being equal, if one firm increases its output, it reduces its rival s profit because it reduces the price at which output is sold. While a firm s profit maximization process takes into account the effect of its output on its own profit, it does not take into account the effect on rival s profit. This basic externality eventually hurts them both.

32 Nash equilibrium (NE): A pair of output (eq 1, eq 2 ) such that: (i) given (belief about) firm 1 s output q 1 = eq 1, firm 2 maximizes its profit π 2 by choosing q 2 = eq 2 (ii) given (belief about) firm 2 s output q 2 = eq 2, firm 1 maximizes its profit π 1 by choosing q 1 = eq 1

33 In order to derive the NE,we first derive the optimal (or profit maximizing) action of each firm for each possible output of the rival firm. This gives us the "best-response curve" or the "reaction function" of each firm. By definition, a NE (eq 1, eq 2 ) is a point that lies on - the best-response curve for firm 1 because eq 1 is firm 1 s best response to eq 2 - the best-response curve for firm 2 because eq 2 is firm 2 s best response to eq 1 i.e., its the intersection of the two best response curves or reaction functions.

34 Deriving the reaction function for firm 2: Fix any output level q 1 = q 1 for firm 1. Then, the residual demand faced by firm 2 is given by a horizontal leftward shift of the market demand curve by an amount q 1. Firm 2 looks at the marginal revenue curve corresponding to this residual demand curve & equates it to the marginal cost c. This determines the best response output of firm 2.

35 If q 1 = 0, then the residual demand faced by firm 2 is simple the market demand curve and so the point at which its MR equates MC is simply the monopoly output q m. So, the best response to zero output by rival, is to produce monopoly output.

36 Forhighervaluesofq 1,the residual market demand is lower, the corresoponding MR curve is even lower and the point at which MR equates MC for firm 2 is smaller.

37 At q 1 = q S,eveniffirm 2 produces zero, the market price is c (because market demand is equal to marginal cost c at q S ) and so firm s best response is zero.

38 So, in a graph where we measure the outputs of firms 1 and 2 on the two axes, the reaction function of firm 2 is a downward sloping curve whose intercept on the q 2 axis is the monopoly output q m and the intercept on the other axis is q S. Note: q m <q S

39 Similarly, we can derive the reaction function of firm 1.

40 The point of intersection: NE.

41 Observe graphically that the point of intersection (eq 1, eq 2 ): (i) lies above the straight line given by the equation q 1 + q 2 = q m (ii) lies below the straight line given by the equation q 1 + q 2 = q S

42 Therefore, q m < eq 1 + eq 2 <q S This means that at the NE of the Cournot game, industry output lies between monopoly output and socially optimal output. The price in the market at the NE outputs: P (eq 1 + eq 2 )= ep(say). Then, p m < ep <c

43 Deriving the NE of the Cournot model anlytically: Consider the specific demand function: q =40 p Suppose c =10.

44 Step 1: Derive the reaction function for firm 2. Suppose q 1 = q 1. The residual demand faced by firm 2 : q 2 =(40 p) q 1 which can be re-written as: p =40 q 1 q 2 so that its total revenue corresponding to any output q 2 : TR 2 = (40 q 1 q 2 )q 2 = (40 q 1 )q 2 (q 2 ) 2 and using our rule for finding slope of a function (treat q 1 as just a constant), we have that the marginal revenue for firm 2 (here q 2 is the variable) is given by: MR 2 =(40 q 1 ) 2q 2

45 Putting MR 2 = MC : (40 q 1 ) 2q 2 =10 we have: q 2 =15 q 1 2

46 More generally, for any q 1 set by firm 1, the best response of firm 2 is q 2 =15 q 1 2 This is the reaction function of firm 2.

47 Step 2: Derive the reaction function for firm 1. Suppose q 2 = q 2. The residual demand faced by firm 1 : q 1 =(40 p) q 2 which can be re-written as: p =40 q 2 q 1 so that its total revenue corresponding to any output q 1 : TR 1 = (40 q 2 q 1 )q 1 = (40 q 2 )q 1 (q 1 ) 2 and using our rule for finding slope of a function (treat q 2 as just a constant), we have that the marginal revenue for firm 1 (here q 1 is the variable) is given by: MR 1 =(40 q 2 ) 2q 1

48 Putting MR 1 = MC : (40 q 2 ) 2q 1 =10 we have: q 1 =15 q 2 2

49 More generally, for any q 2 set by firm 2, the best response of firm 1 is q 1 =15 q 2 2 This is the reaction function of firm 1.

50 Step 3: Find the point of intersection (eq 1, eq 2 )of the two reaction functions. Such a point must lie on both reaction functions i.e., eq 1 =15 e q 2 2 eq 2 =15 e q 1 2 Solve these two equations simultaneously for two unknowns (eq 1, eq 2 ). Solution: eq 1 = eq 2 =10.

51 Industry output in equilibrium = eq 1 + eq 2 =20. Equilibrium price: ep =40 20 = 20 Equilibrium profit of each firm= 100.

52 Comparison: Monopoly price and output in this market: p m =25,q m = 15. Socially optimal output: q S =30.

53 Asymmetric Cost Oligopoly. In the models of oligopoly we looked at so far, firms are identical. What if firms differ in their efficiency or productivity? Production costs may differ.

54 Bertrand Model with Asymmetric Cost. 2 firms: 1 and 2. Both produce at constant unit cost. Marginal cost of firm 1: c 1 Marginal cost of firm 2: c 2 Firms compete in prices - as in the standard model of Bertrand price competition (no capacity constraints). We have seen that if c 1 = c 2, unique NE is that both firms set price equal to MC and earn zero profit.

55 What if c 1 <c 2? First, note that firm 2 can never make money in any NE. To make money, p 2 >c 2 in which case firm 1 will find it optimaltoundercutfirm 2. However, if firm 1 charges a price p 1 just below c 2, it will never be matched or undercut by firm 2 and it can make money.

56 This is actually the NE if c 1 and c 2 are not too far apart. But if c 2 is extremely high relative to c 1 so that firm 1 s monopoly price is below c 2,thenfirm 1 simply charges monopoly price. In both cases, the relatively inefficient firm (firm 2) gets wiped out of the market. This is a consequence of severe competition.

57 Note that if c 1 and c 2 are "close", then even though firm 2 gets zero market share and firm 1 has 100 % of the market - it cannot charge a monopoly price - threat of "potential competition" can discourage monopoly power.

58 Cournot Model with Asymmetric Cost. Cournot model: oligopolistic competition is softer. So, there is greater scope for a relatively inefficient firm to produce profitably in the market. 2 firms: 1 and 2. Both produce at constant unit cost. Marginal cost of firm 1: c 1 Marginal cost of firm 2: c 2 Firms compete in quantity of output (or capacity) - as in the standard Cournot model.

59 Consider the reaction function of any firm, say firm 1. Given output q 2 = q 2 of its rival, firm 1 looks at the residual demand curve and equates marginal revenue corresponding to that residual demand to its MC c 1. Lower its own marginal cost c 1 is, higher the "best response" output of firm 1. In other words, if c 1 decreases the entire reaction function or best response curve of firm 1 shifts up.

60 So, lets suppose thar initially we have a symmetric situation where c 1 = c 2 so that the two best response curves are mirror images of each other and at the NE, both firms produce identical output. Now, if firm 1 s marginal cost c 1 falls slightly i.e. we move to a situation where c 1 <c 2, its reaction function shifts up The point of intersection of the two best response curves i.e., the NE moves to a point where firm 1 has a higher market share and not surprisingly, higher profit. But firm 2 still has a positive market share.

61 If c 1 falls drastically, so that its reaction shifts up in a big way, there may no longer be any positive interesection between the two reaction functions. In that case, firm 1 produces its monopoly output and firm 2 produces zero.

### Managerial Economics & Business Strategy Chapter 9. Basic Oligopoly Models

Managerial Economics & Business Strategy Chapter 9 Basic Oligopoly Models Overview I. Conditions for Oligopoly? II. Role of Strategic Interdependence III. Profit Maximization in Four Oligopoly Settings

### Price competition with homogenous products: The Bertrand duopoly model [Simultaneous move price setting duopoly]

ECON9 (Spring 0) & 350 (Tutorial ) Chapter Monopolistic Competition and Oligopoly (Part ) Price competition with homogenous products: The Bertrand duopoly model [Simultaneous move price setting duopoly]

### Oligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry s output.

Topic 8 Chapter 13 Oligopoly and Monopolistic Competition Econ 203 Topic 8 page 1 Oligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry

### ECON 312: Oligopolisitic Competition 1. Industrial Organization Oligopolistic Competition

ECON 312: Oligopolisitic Competition 1 Industrial Organization Oligopolistic Competition Both the monopoly and the perfectly competitive market structure has in common is that neither has to concern itself

### University of Hong Kong ECON6021 Microeconomic Analysis Oligopoly

1 Introduction University of Hong Kong ECON6021 Microeconomic Analysis Oligopoly There are many real life examples that the participants have non-negligible influence on the market. In such markets, every

### 3.4. Bertrand Model Bertrand Model

atilde achado 1 In Cournot, firms decide how much to produce and the market price is set such that supply equals demand. But the sentence price is set is too imprecise. In reality how does it work exactly?

### New Technology and Profits

Another useful comparative statics exercise is to determine how much a firm would pay to reduce its marginal costs to that of its competitor. This will simply be the difference between its profits with

### Oligopoly and Strategic Pricing

R.E.Marks 1998 Oligopoly 1 R.E.Marks 1998 Oligopoly Oligopoly and Strategic Pricing In this section we consider how firms compete when there are few sellers an oligopolistic market (from the Greek). Small

### UNIT 6 cont PRICING UNDER DIFFERENT MARKET STRUCTURES. Monopolistic Competition

UNIT 6 cont PRICING UNDER DIFFERENT MARKET STRUCTURES Monopolistic Competition Market Structure Perfect Competition Pure Monopoly Monopolistic Competition Oligopoly Duopoly Monopoly The further right on

### Week 7 - Game Theory and Industrial Organisation

Week 7 - Game Theory and Industrial Organisation The Cournot and Bertrand models are the two basic templates for models of oligopoly; industry structures with a small number of firms. There are a number

### NONCOOPERATIVE OLIGOPOLY MODELS

NONCOOPERATIVE OLIGOPOLY MODELS 1. INTRODUCTION AND DEFINITIONS Definition 1 (Oligopoly). Noncooperative oligopoly is a market where a small number of firms act independently but are aware of each other

### Chapter 7 Monopoly, Oligopoly and Strategy

Chapter 7 Monopoly, Oligopoly and Strategy After reading Chapter 7, MONOPOLY, OLIGOPOLY AND STRATEGY, you should be able to: Define the characteristics of Monopoly and Oligopoly, and explain why the are

### The Basics of Game Theory

Sloan School of Management 15.010/15.011 Massachusetts Institute of Technology RECITATION NOTES #7 The Basics of Game Theory Friday - November 5, 2004 OUTLINE OF TODAY S RECITATION 1. Game theory definitions:

### Price Competition Under Product Differentiation

Competition Under Product Differentiation Chapter 10: Competition 1 Introduction In a wide variety of markets firms compete in prices Internet access Restaurants Consultants Financial services Without

### Economics II: Micro Fall 2009 Exercise session 5. Market with a sole supplier is Monopolistic.

Economics II: Micro Fall 009 Exercise session 5 VŠE 1 Review Optimal production: Independent of the level of market concentration, optimal level of production is where MR = MC. Monopoly: Market with a

### Oligopoly. Chapter 10. 10.1 Overview

Chapter 10 Oligopoly 10.1 Overview Oligopoly is the study of interactions between multiple rms. Because the actions of any one rm may depend on the actions of others, oligopoly is the rst topic which requires

### Economics 203: Intermediate Microeconomics I Lab Exercise #11. Buy Building Lease F1 = 500 F1 = 750 Firm 2 F2 = 500 F2 = 400

Page 1 March 19, 2012 Section 1: Test Your Understanding Economics 203: Intermediate Microeconomics I Lab Exercise #11 The following payoff matrix represents the long-run payoffs for two duopolists faced

### A Detailed Price Discrimination Example

A Detailed Price Discrimination Example Suppose that there are two different types of customers for a monopolist s product. Customers of type 1 have demand curves as follows. These demand curves include

### CHAPTER 6 MARKET STRUCTURE

CHAPTER 6 MARKET STRUCTURE CHAPTER SUMMARY This chapter presents an economic analysis of market structure. It starts with perfect competition as a benchmark. Potential barriers to entry, that might limit

### 9.1 Cournot and Bertrand Models with Homogeneous Products

1 Chapter 9 Quantity vs. Price Competition in Static Oligopoly Models We have seen how price and output are determined in perfectly competitive and monopoly markets. Most markets are oligopolistic, however,

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Chap 13 Monopolistic Competition and Oligopoly These questions may include topics that were not covered in class and may not be on the exam. MULTIPLE CHOICE. Choose the one alternative that best completes

### Examples on Monopoly and Third Degree Price Discrimination

1 Examples on Monopoly and Third Degree Price Discrimination This hand out contains two different parts. In the first, there are examples concerning the profit maximizing strategy for a firm with market

### Market Structure: Duopoly and Oligopoly

WSG10 7/7/03 4:24 PM Page 145 10 Market Structure: Duopoly and Oligopoly OVERVIEW An oligopoly is an industry comprising a few firms. A duopoly, which is a special case of oligopoly, is an industry consisting

### Chapter 27: Taxation. 27.1: Introduction. 27.2: The Two Prices with a Tax. 27.2: The Pre-Tax Position

Chapter 27: Taxation 27.1: Introduction We consider the effect of taxation on some good on the market for that good. We ask the questions: who pays the tax? what effect does it have on the equilibrium

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MBA 640 Survey of Microeconomics Fall 2006, Quiz 6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly is best defined as a firm that

### Chapter 13 Perfect Competition

Chapter 13 Perfect Competition 13.1 A Firm's Profit-Maximizing Choices 1) What is the difference between perfect competition and monopolistic competition? A) Perfect competition has a large number of small

### Chapter 12 Monopolistic Competition and Oligopoly

Chapter Monopolistic Competition and Oligopoly Review Questions. What are the characteristics of a monopolistically competitive market? What happens to the equilibrium price and quantity in such a market

### INDUSTRIAL ECONOMICS COMPONENT: THE INTERACTIVE TEXTBOOK

UNIT EC407, LEVEL 2 INDUSTRIAL ECONOMICS COMPONENT: THE INTERACTIVE TEXTBOOK Semester 1 1998/99 Lecturer: K. Hinde Room: 427 Northumberland Building Tel: 0191 2273936 email: kevin.hinde@unn.ac.uk Web Page:

### 3.2. Cournot Model. Matilde Machado

Matilde Machado 1 Assumptions: All firms produce an homogenous product The market price is therefore the result of the total supply (same price for all firms) Firms decide simultaneously how much to produce

### Finance 360 Problem Set #8 Solutions

Finance 360 Problem Set #8 Solutions ) Consider the game of chicken. Two players drive their cars down the center of the road directly at each other. Each player chooses SWERVE or STAY. Staying wins you

### EC508: Microeconomic Theory Midterm 3

EC508: Microeconomic Theory Midterm 3 Instructions: Neatly write your name on the top right hand side of the exam. There are 25 points possible. Your exam solution is due Tuesday Nov 24, 2015 at 5pm. You

economicsentrance.weebly.com Basic Exercises Micro Economics AKG 09 Table of Contents MICRO ECONOMICS Budget Constraint... 4 Practice problems... 4 Answers... 4 Supply and Demand... 7 Practice Problems...

### Elasticity. I. What is Elasticity?

Elasticity I. What is Elasticity? The purpose of this section is to develop some general rules about elasticity, which may them be applied to the four different specific types of elasticity discussed in

### Learning Objectives. Chapter 6. Market Structures. Market Structures (cont.) The Two Extremes: Perfect Competition and Pure Monopoly

Chapter 6 The Two Extremes: Perfect Competition and Pure Monopoly Learning Objectives List the four characteristics of a perfectly competitive market. Describe how a perfect competitor makes the decision

### Chapter. Perfect Competition CHAPTER IN PERSPECTIVE

Perfect Competition Chapter 10 CHAPTER IN PERSPECTIVE In Chapter 10 we study perfect competition, the market that arises when the demand for a product is large relative to the output of a single producer.

### Chapter 11. T he economy that we. The World of Oligopoly: Preliminaries to Successful Entry. 11.1 Production in a Nonnatural Monopoly Situation

Chapter T he economy that we are studying in this book is still extremely primitive. At the present time, it has only a few productive enterprises, all of which are monopolies. This economy is certainly

### Mikroekonomia B by Mikolaj Czajkowski. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Mikroekonomia B by Mikolaj Czajkowski Test 12 - Oligopoly Name Group MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The market structure in which

### Pure Competition urely competitive markets are used as the benchmark to evaluate market

R. Larry Reynolds Pure Competition urely competitive markets are used as the benchmark to evaluate market P performance. It is generally believed that market structure influences the behavior and performance

### Competition and Regulation. Lecture 2: Background on imperfect competition

Competition and Regulation Lecture 2: Background on imperfect competition Monopoly A monopolist maximizes its profits, choosing simultaneously quantity and prices, taking the Demand as a contraint; The

### Midterm Exam #1 - Answers

Page 1 of 9 Midterm Exam #1 Answers Instructions: Answer all questions directly on these sheets. Points for each part of each question are indicated, and there are 1 points total. Budget your time. 1.

### Economics 165 Winter 2002 Problem Set #2

Economics 165 Winter 2002 Problem Set #2 Problem 1: Consider the monopolistic competition model. Say we are looking at sailboat producers. Each producer has fixed costs of 10 million and marginal costs

### ECON 600 Lecture 3: Profit Maximization Π = TR TC

ECON 600 Lecture 3: Profit Maximization I. The Concept of Profit Maximization Profit is defined as total revenue minus total cost. Π = TR TC (We use Π to stand for profit because we use P for something

### Cournot s model of oligopoly

Cournot s model of oligopoly Single good produced by n firms Cost to firm i of producing q i units: C i (q i ), where C i is nonnegative and increasing If firms total output is Q then market price is P(Q),

### ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS

ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS Due the Week of June 23 Chapter 8 WRITE [4] Use the demand schedule that follows to calculate total revenue and marginal revenue at each quantity. Plot

### Oligopoly is a market structure more susceptible to game-theoretic analysis, because of apparent strategic interdependence among a few producers.

1 Market structure from a game-theoretic perspective: Oligopoly After our more theoretical analysis of different zero-sum and variable-sum games, let us return to the more familiar territory of economics---especially

### All these models were characterized by constant returns to scale technologies and perfectly competitive markets.

Economies of scale and international trade In the models discussed so far, differences in prices across countries (the source of gains from trade) were attributed to differences in resources/technology.

### Equilibrium: Illustrations

Draft chapter from An introduction to game theory by Martin J. Osborne. Version: 2002/7/23. Martin.Osborne@utoronto.ca http://www.economics.utoronto.ca/osborne Copyright 1995 2002 by Martin J. Osborne.

### Oligopoly: Cournot/Bertrand/Stackelberg

Outline Alternative Market Models Wirtschaftswissenschaften Humboldt Universität zu Berlin March 5, 2006 Outline 1 Introduction Introduction Alternative Market Models 2 Game, Reaction Functions, Solution

### Lecture 28 Economics 181 International Trade

Lecture 28 Economics 181 International Trade I. Introduction to Strategic Trade Policy If much of world trade is in differentiated products (ie manufactures) characterized by increasing returns to scale,

### Monopolistic Competition, Oligopoly, and maybe some Game Theory

Monopolistic Competition, Oligopoly, and maybe some Game Theory Now that we have considered the extremes in market structure in the form of perfect competition and monopoly, we turn to market structures

### 1 st Exam. 7. Cindy's cross-price elasticity of magazine demand with respect to the price of books is

1 st Exam 1. Marginal utility measures: A) the total utility of all your consumption B) the total utility divided by the price of the good C) the increase in utility from consuming one additional unit

### CHAPTER 12 MARKETS WITH MARKET POWER Microeconomics in Context (Goodwin, et al.), 2 nd Edition

CHAPTER 12 MARKETS WITH MARKET POWER Microeconomics in Context (Goodwin, et al.), 2 nd Edition Chapter Summary Now that you understand the model of a perfectly competitive market, this chapter complicates

### ECON101 STUDY GUIDE 7 CHAPTER 14

ECON101 STUDY GUIDE 7 CHAPTER 14 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) An oligopoly firm is similar to a monopolistically competitive

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Chapter 11 Monopoly practice Davidson spring2007 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly industry is characterized by 1) A)

### Do not open this exam until told to do so.

Do not open this exam until told to do so. Department of Economics College of Social and Applied Human Sciences K. Annen, Winter 004 Final (Version ): Intermediate Microeconomics (ECON30) Solutions Final

### Industrial Organization - II

1 1 Ecole Polytechnique Oligopolistic Competition: Introduction In an oligopolistic market structure, a firm no longer encounters a passive environment: strategic interactions b/w players modeled via noncooperative

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Chapter 11 Perfect Competition - Sample Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Perfect competition is an industry with A) a

### Pre-Test Chapter 22 ed17

Pre-Test Chapter 22 ed17 Multiple Choice Questions 1. Refer to the above diagram. At the profit-maximizing level of output, total revenue will be: A. NM times 0M. B. 0AJE. C. 0EGC. D. 0EHB. 2. For a pure

### Profit maximization in different market structures

Profit maximization in different market structures In the cappuccino problem as well in your team project, demand is clearly downward sloping if the store wants to sell more drink, it has to lower the

### 12 Monopolistic Competition and Oligopoly

12 Monopolistic Competition and Oligopoly Read Pindyck and Rubinfeld (2012), Chapter 12 09/04/2015 CHAPTER 12 OUTLINE 12.1 Monopolistic Competition 12.2 Oligopoly 12.3 Price Competition 12.4 Competition

### Employment and Pricing of Inputs

Employment and Pricing of Inputs Previously we studied the factors that determine the output and price of goods. In chapters 16 and 17, we will focus on the factors that determine the employment level

### c. Given your answer in part (b), what do you anticipate will happen in this market in the long-run?

Perfect Competition Questions Question 1 Suppose there is a perfectly competitive industry where all the firms are identical with identical cost curves. Furthermore, suppose that a representative firm

### Chapter 16 Monopolistic Competition and Oligopoly

Chapter 16 Monopolistic Competition and Oligopoly Market Structure Market structure refers to the physical characteristics of the market within which firms interact It is determined by the number of firms

### Pricing and Output Decisions: i Perfect. Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young

Chapter 9 Pricing and Output Decisions: i Perfect Competition and Monopoly M i l E i E i Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young Pricing and

### Microeconomics. Lecture Outline. Claudia Vogel. Winter Term 2009/2010. Part III Market Structure and Competitive Strategy

Microeconomics Claudia Vogel EUV Winter Term 2009/2010 Claudia Vogel (EUV) Microeconomics Winter Term 2009/2010 1 / 25 Lecture Outline Part III Market Structure and Competitive Strategy 12 Monopolistic

### Chapter 13 Oligopoly 1

Chapter 13 Oligopoly 1 4. Oligopoly A market structure with a small number of firms (usually big) Oligopolists know each other: Strategic interaction: actions of one firm will trigger re-actions of others

### Chapter 6 Competitive Markets

Chapter 6 Competitive Markets After reading Chapter 6, COMPETITIVE MARKETS, you should be able to: List and explain the characteristics of Perfect Competition and Monopolistic Competition Explain why a

### MODULE 64: INTRODUCTION TO OLIGOPOLY Schmidty School of Economics. Wednesday, December 4, 2013 9:20:15 PM Central Standard Time

MODULE 64: INTRODUCTION TO OLIGOPOLY Schmidty School of Economics Learning Targets I Can Understand why oligopolists have an incentive to act in ways that reduce their combined profit. Explain why oligopolies

### Problems on Perfect Competition & Monopoly

Problems on Perfect Competition & Monopoly 1. True and False questions. Indicate whether each of the following statements is true or false and why. (a) In long-run equilibrium, every firm in a perfectly

### Summary Chapter 12 Monopoly

Summary Chapter 12 Monopoly Defining Monopoly - A monopoly is a market structure in which a single seller of a product with no close substitutes serves the entire market - One practical measure for deciding

### Market Structure: Perfect Competition and Monopoly

WSG8 7/7/03 4:34 PM Page 113 8 Market Structure: Perfect Competition and Monopoly OVERVIEW One of the most important decisions made by a manager is how to price the firm s product. If the firm is a profit

### Lecture 2. Marginal Functions, Average Functions, Elasticity, the Marginal Principle, and Constrained Optimization

Lecture 2. Marginal Functions, Average Functions, Elasticity, the Marginal Principle, and Constrained Optimization 2.1. Introduction Suppose that an economic relationship can be described by a real-valued

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Economics 103 Spring 2012: Multiple choice review questions for final exam. Exam will cover chapters on perfect competition, monopoly, monopolistic competition and oligopoly up to the Nash equilibrium

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MPP 801 Perfect Competition K. Wainwright Study Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Refer to Figure 9-1. If the price a perfectly

### Equilibrium of a firm under perfect competition in the short-run. A firm is under equilibrium at that point where it maximizes its profits.

Equilibrium of a firm under perfect competition in the short-run. A firm is under equilibrium at that point where it maximizes its profits. Profit depends upon two factors Revenue Structure Cost Structure

### Chapter 13 Market Structure and Competition

Chapter 13 Market Structure and Competition Solutions to Review Questions 1. Explain why, at a Cournot equilibrium with two firms, neither firm would have any regret about its output choice after it observes

### Final Exam (Version 1) Answers

Final Exam Economics 101 Fall 2003 Wallace Final Exam (Version 1) Answers 1. The marginal revenue product equals A) total revenue divided by total product (output). B) marginal revenue divided by marginal

### Revenue Structure, Objectives of a Firm and. Break-Even Analysis.

Revenue :The income receipt by way of sale proceeds is the revenue of the firm. As with costs, we need to study concepts of total, average and marginal revenues. Each unit of output sold in the market

### Managerial Economics Prof. Trupti Mishra S.J.M. School of Management Indian Institute of Technology, Bombay. Lecture - 13 Consumer Behaviour (Contd )

(Refer Slide Time: 00:28) Managerial Economics Prof. Trupti Mishra S.J.M. School of Management Indian Institute of Technology, Bombay Lecture - 13 Consumer Behaviour (Contd ) We will continue our discussion

### The Analysis of the Article Microsoft's Aggressive New Pricing Strategy Using. Microeconomic Theory

2 The Analysis of the Article Microsoft's Aggressive New Pricing Strategy Using Microeconomic Theory I. Introduction: monopolistic power as a means of getting high profits II. The review of the article

### Unit 7. Firm behaviour and market structure: monopoly

Unit 7. Firm behaviour and market structure: monopoly Learning objectives: to identify and examine the sources of monopoly power; to understand the relationship between a monopolist s demand curve and

ANSWERS TO END-OF-CHAPTER QUESTIONS 23-1 Briefly indicate the basic characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly. Under which of these market classifications

### Microeconomics II. ELTE Faculty of Social Sciences, Department of Economics. week 9 MARKET THEORY AND MARKETING, PART 3

MICROECONOMICS II. ELTE Faculty of Social Sciences, Department of Economics Microeconomics II. MARKET THEORY AND MARKETING, PART 3 Author: Supervised by February 2011 Prepared by:, using Jack Hirshleifer,

### Lecture 4: Nash equilibrium in economics: monopolies and duopolies

Lecture : Nash equilibrium in economics: monopolies and duopolies We discuss here an application of Nash equilibrium in economics, the Cournot s duopoly model. This is a very classical problem which in

### Ecn 221 - Unit 10 Monopolistic Competition & Oligopoly

Ecn 221 - Unit 10 Monopolistic Competition & Oligopoly An industry characterized by monopolistic competition is similar to the case of perfect competition in that there are many firms, and entry into the

### Managerial Economics Prof. Trupti Mishra S.J.M School of Management Indian Institute of Technology, Bombay. Lecture - 14 Elasticity of Supply

Managerial Economics Prof. Trupti Mishra S.J.M School of Management Indian Institute of Technology, Bombay Lecture - 14 Elasticity of Supply We will continue our discussion today, on few more concept of

### Nash Equilibrium and Duopoly Theory

ash Equilibrium Economics A ection otes GI: David Albouy ash Equilibrium and Duopoly Theory Considerthecasewherethecasewith =firms, indexed by i =,. Most of what we consider here is generalizable for larger

### Practice Questions Week 8 Day 1

Practice Questions Week 8 Day 1 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The characteristics of a market that influence the behavior of market participants

### or, put slightly differently, the profit maximizing condition is for marginal revenue to equal marginal cost:

Chapter 9 Lecture Notes 1 Economics 35: Intermediate Microeconomics Notes and Sample Questions Chapter 9: Profit Maximization Profit Maximization The basic assumption here is that firms are profit maximizing.

### Profit Maximization. 2. product homogeneity

Perfectly Competitive Markets It is essentially a market in which there is enough competition that it doesn t make sense to identify your rivals. There are so many competitors that you cannot single out

### themselves to only a few, and we will explore examples along this continuum.

CHAPTER 6 PERFECT COMPETITION, MONOPOLY AND ECONOMIC VERSUS NORMAL PROFIT CHAPTER OBJECTIVES When you have completed this chapter you will understand the distinction between perfect competition and monopoly,

### 11 PERFECT COMPETITION. Chapter. Competition

Chapter 11 PERFECT COMPETITION Competition Topic: Perfect Competition 1) Perfect competition is an industry with A) a few firms producing identical goods B) a few firms producing goods that differ somewhat

### Long-Run Average Cost. Econ 410: Micro Theory. Long-Run Average Cost. Long-Run Average Cost. Economies of Scale & Scope Minimizing Cost Mathematically

Slide 1 Slide 3 Econ 410: Micro Theory & Scope Minimizing Cost Mathematically Friday, November 9 th, 2007 Cost But, at some point, average costs for a firm will tend to increase. Why? Factory space and

### Oligopoly. Models of Oligopoly Behavior No single general model of oligopoly behavior exists. Oligopoly. Interdependence.

Oligopoly Chapter 16-2 Models of Oligopoly Behavior No single general model of oligopoly behavior exists. Oligopoly An oligopoly is a market structure characterized by: Few firms Either standardized or

### Econ 111 (04) 2nd Midterm A

Econ 111 (04) 2nd Midterm A MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which one of the following does not occur in perfect competition? A)

### 4. Market Structures. Learning Objectives 4-63. Market Structures

1. Supply and Demand: Introduction 3 2. Supply and Demand: Consumer Demand 33 3. Supply and Demand: Company Analysis 43 4. Market Structures 63 5. Key Formulas 81 2014 Allen Resources, Inc. All rights

### Management Accounting 243 Pricing Decision Analysis

Management Accounting 243 Pricing Decision Analysis The setting of a price for a product is one of the most important decisions and certainly one of the more complex. A change in price not only directly