Slide 1Copyright © 2004 McGraw-Hill Ryerson Limited Chapter 13 Oligopoly and Monopolistic...

Copyright © 2004 McGraw-Hill Ryerson Limited

Chapter 13

Oligopoly and

Monopolistic

Competition


FIGURE 13-1

The Profit-Maximizing Cournot Duopolist

The Cournot duopolist’s demand curve is obtained by shifting the vertical axis rightward by the amount produced by the other duopolist (Q2 in the diagram). The portion of the original market demand curve that lies to the right of this new vertical axis is the demand curve facing firm 1. Firm 1 then maximizes profit by equating marginal revenue and marginal cost, the latter of which is zero.


FIGURE 13-2

Reaction Functions for the Cournot Duopolists

The reaction function for each duopolist gives its profit-maximizing output level as a function of the other firm’s output level. The duopolists are in a stable equilibrium at the point of intersection of their reaction functions.


FIGURE 13-3

Deriving the Reaction Functions for Specific Duopolists

Panel a shows the profit-maximizingoutput level for firm 1(Q ) when firm 2produces Q2. Thatand the parallelexpression for firm 2constitute the reactionfunctions plotted inpanel b.

*1


FIGURE 13-4

The Stackelberg Leader’s Demand, Marginal Revenue, and Profit Functions

(a) When firm 1 knows firm2 is a Cournot duopolist, itcan take account of theeffect of its own behaviouron firm 2’s quantity choice.The result is that it knowsexactly what its (residual)demand curve will be. (b) Firm 1’s profit function,with zero costs, is1 = PQ1 = (aQ1 – bQ1

2)/2,which reaches a maximumat Q = a/(2b), with = a2/8b.

*1

*1


FIGURE 13-5

The Stackelberg Equilibrium

In the Stackelberg model, firm 1 ignores its own reaction function from the Cournot model. It chooses its own quantity to maximize profit, taking into account the effect that its own quantity will have on the quantity offered by firm 2.


FIGURE 13-6

Comparing Equilibrium Price and Quantity

The monopolist would maximize profit where marginal revenue equals zero, since there are no marginal production costs. The equilibrium price will be higher, and the equilibrium quantity lower, than in the Cournot, Stackelberg, and Bertrand cases.


TABLE 13-1

Comparison of Oligopoly Models

All five models assume a market demand curve of P = a –bQ and two identical firms with marginal cost equal to zero. (Of course, if marginal cost is not zero, some entries will differ from the ones shown.)

Model Industry output Q Market price P Industry profit

Shared monopoly Qm = a/(2b) Pm = a/2 m = a2/(4b)

Cournot (4/3)Qm (2/3)Pm (8/9)m

Stackelberg (3/2)Qm (1/2)Pm (3/4)m

Bertrand 2Qm 0 0

Perfect competition 2Qm 0 0


TABLE 13-2

Why Minimax?

In game (a), each player has a dominant strategy: the equilibrium is in the northeast cell of the matrix. In games (b), (c), and (d), Ron has no dominant strategy. In game (b), Colleen’s dominant strategy (c1) minimizes her losses regardless of Ron’s strategy. In games (c) and (d), Colleen has no dominant strategy, but her “minimax” strategy (c1) minimizes the maximum loss she could sustain.


TABLE 13-3

The Prisoner’s Dilemma

Each player believes he will always get a shorter sentence by confessing, no matter what the other player does. And if each player confesses, each gets 5 years. Yet if both players had remained silent, each would have gotten only 1 year in jail. Here, the individual pursuit of self-interest produces a worse outcome for each player.

Prisoner Y

Confess Remain silent

Confess 5 years 0 years for X

for each 20 years for Y

Prisoner X

Remain silent 20 years for X 1 year

0 years for Y for each


TABLE 13-4

Profits to Cooperation and Defection

The dominant strategy is for each firm to defect, for by so doing it earns higher profit no matter which option its rival chooses. Yet when both defect, each earns less than when each cooperates.

Firm 1

Cooperate(P = 10)

Defect(P = 9)

Cooperate 1 = 50

1 = 99

(P = 10) 2 = 50

2 = 0

Firm 2

Defect 1 = 0

1 = 49.50

(P = 9) 2 = 99

2 = 49.50


TABLE 13-5

The Advertising Decision as a Prisoner’s Dilemma

In many industries the primary effect of advertising is to cause consumers to switch brands. In such industries, the dominant strategy is to advertise heavily (lower right cell), even though firms taken as a whole would do better by not advertising (upper left cell).

Firm 1

Don’t advertise Advertise

Don’t advertise 1 = 500

1 = 750

2 = 500 2 = 0

Firm 2

Advertise 1 = 0

1 = 250

2 = 750 2 = 250


TABLE 13-6

A Game in Which Firm 2 Has No Dominant Strategy

Firm 1 earns higher profits by advertising, no matter what firm 2 does. Its dominant strategy is to advertise. But firm 2 has no dominant strategy. If firm 1 advertises, firm 2 does best also to advertise, but if firm 1 does not advertise, firm 2 does best not to advertise.

Firm 1

Don’t advertise Advertise

Don’t advertise 1 = 500

1 = 750

2 = 400 2 = 0

Firm 2

Advertise 1 = 0

1 = 300

2 = 300 2 = 200


EXERCISE 13-4 Firm 1

High research budget Low research budget

High research budget 1 = 200

1 = 60

2 = 40

2 = 100

Firm 2

Low research budget 1 = 0

1 = 40

2 = 30

2 = 80


FIGURE 13-7Theme Park Decision

If Joyworld enters, then Funland must decide whether to build the Devil Twist. Since Funland earns a higher profit at E than at D, it will not build the Devil Twist. Hence Joyworld will enter the market.


FIGURE 13-8

Strategic Entry Deterrence

Had it originally purchased the additional land, Funland could earn more profits by building the Devil Twist than by not building it, if Joyworld entered. Hence Joyworld doesn’t enter. The Nash equilibrium of the altered game is now at point C.


FIGURE 13-9

Time-Path of Output and Prices with Zero Entry Costs

With MC = 0, no entry costs, and one potential entrant per period, over time the equilibrium Q approaches the competitive output level and P approaches zero.


FIGURE 13-10

An Industry in Which Location Is the Important Differentiating Feature

Restaurants (heavy black squares) are thesame except for theirgeographic location.Each person dines atthe restaurant closest tohome. If thecircumference of theloop is km, thismeans that the distancebetween restaurantswill be km, giving riseto a maximum one-waytrip length of km.

14

18


FIGURE 13-11

Distances with N Outlets

With N outlets, the distance between adjacent outlets will be 1/N. The farthest a person can live from an outlet is 1/2N. And the average one-way distance people must travel to reach the nearest outlet is 1/4N. The average round-trip distance is 1/2N.


FIGURE 13-12

The Optimal Number of Outlets

Total transportation cost (Ctrans) declines with the number of outlets (N), while total cost of meals served (Cmeals) increases with N. The optimal number of outlets (N*) is the one that minimizes the sum of these costs.


FIGURE 13-13

A Spatial Interpretation of Airline Scheduling

In a market with four flights per day, there is no traveller for whom there is not a flight leaving within 3 hours of his most preferred departure time.


FIGURE 13-14

The Hot Dog Vendor Location Problem

Each hot dog vendor does best by positioning himself at the centre of the beach, even though that location does not minimize the average distance that their customers must travel.


Figure 13-15

A Political Location Problem

Initially the two parties in a single-issue election are at A and B. Competition for votes compels them to re-position their platforms closer to the midpoint 0, at A’ and B’.


PROBLEM 1 Model Q1 Q2 Q1 + Q2 P 1

2

1 + 2

Sharedmonopoly

Cournot

Bertrand

Stackelberg


PROBLEM 8 Firm 1

Big car Small car

Big car 1 = 400

1 = 800

2 = 400 2 = 1000

Firm 2

Small car 1 = 1000

1 = 500

2 = 800 2 = 500


ANSWER 13-1

Slide 1Copyright © 2004 McGraw-Hill Ryerson Limited Chapter 13 Oligopoly and Monopolistic...

Documents

Transcript of Slide 1Copyright © 2004 McGraw-Hill Ryerson Limited Chapter 13 Oligopoly and Monopolistic...