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1、Chapter Twenty-Seven,Oligopoly,Oligopoly,A monopoly is an industry consisting a single firm. A duopoly is an industry consisting of two firms. An oligopoly is an industry consisting of a few firms. Particularly, each firms own price or output decisions affect its competitors profits.,Oligopoly,How d
2、o we analyze markets in which the supplying industry is oligopolistic? Consider the duopolistic case of two firms supplying the same product.,Quantity Competition,Assume that firms compete by choosing output levels. If firm 1 produces y1 units and firm 2 produces y2 units then total quantity supplie
3、d is y1 + y2. The market price will be p(y1+ y2). The firms total cost functions are c1(y1) and c2(y2).,Quantity Competition,Suppose firm 1 takes firm 2s output level choice y2 as given. Then firm 1 sees its profit function as Given y2, what output level y1 maximizes firm 1s profit?,Quantity Competi
4、tion; An Example,Suppose that the market inverse demand function isand that the firms total cost functions are,and,Quantity Competition; An Example,Then, for given y2, firm 1s profit function is,Quantity Competition; An Example,Then, for given y2, firm 1s profit function is,So, given y2, firm 1s pro
5、fit-maximizingoutput level solves,Quantity Competition; An Example,Then, for given y2, firm 1s profit function is,So, given y2, firm 1s profit-maximizingoutput level solves,I.e. firm 1s best response to y2 is,Quantity Competition; An Example,y2,y1,60,15,Firm 1s “reaction curve”,Quantity Competition;
6、 An Example,Similarly, given y1, firm 2s profit function is,Quantity Competition; An Example,Similarly, given y1, firm 2s profit function is,So, given y1, firm 2s profit-maximizingoutput level solves,Quantity Competition; An Example,Similarly, given y1, firm 2s profit function is,So, given y1, firm
7、2s profit-maximizingoutput level solves,I.e. firm 1s best response to y2 is,Quantity Competition; An Example,y2,y1,Firm 2s “reaction curve”,45/4,45,Quantity Competition; An Example,An equilibrium is when each firms output level is a best response to the other firms output level, for then neither wan
8、ts to deviate from its output level. A pair of output levels (y1*,y2*) is a Cournot-Nash equilibrium if,and,Quantity Competition; An Example,and,Quantity Competition; An Example,and,Substitute for y2* to get,Quantity Competition; An Example,and,Substitute for y2* to get,Quantity Competition; An Exam
9、ple,and,Substitute for y2* to get,Hence,Quantity Competition; An Example,and,Substitute for y2* to get,Hence,So the Cournot-Nash equilibrium is,Quantity Competition; An Example,y2,y1,Firm 2s “reaction curve”,60,15,Firm 1s “reaction curve”,45/4,45,Quantity Competition; An Example,y2,y1,Firm 2s “react
10、ion curve”,48,60,Firm 1s “reaction curve”,8,13,Cournot-Nash equilibrium,Quantity Competition,Generally, given firm 2s chosen outputlevel y2, firm 1s profit function is,and the profit-maximizing value of y1 solves,The solution, y1 = R1(y2), is firm 1s Cournot-Nash reaction to y2.,Quantity Competition
11、,Similarly, given firm 1s chosen outputlevel y1, firm 2s profit function is,and the profit-maximizing value of y2 solves,The solution, y2 = R2(y1), is firm 2s Cournot-Nash reaction to y1.,Quantity Competition,y2,y1,Firm 1s “reaction curve”,Firm 1s “reaction curve”,Cournot-Nash equilibrium y1* = R1(y
12、2*) and y2* = R2(y1*),Iso-Profit Curves,For firm 1, an iso-profit curve contains all the output pairs (y1,y2) giving firm 1 the same profit level P1. What do iso-profit curves look like?,y2,y1,Iso-Profit Curves for Firm 1,With y1 fixed, firm 1s profitincreases as y2 decreases.,y2,y1,Increasing profi
13、tfor firm 1.,Iso-Profit Curves for Firm 1,y2,y1,Iso-Profit Curves for Firm 1,Q: Firm 2 chooses y2 = y2.Where along the line y2 = y2 is the output level thatmaximizes firm 1s profit?,y2,y2,y1,Iso-Profit Curves for Firm 1,Q: Firm 2 chooses y2 = y2.Where along the line y2 = y2 is the output level thatm
14、aximizes firm 1s profit? A: The point attaining thehighest iso-profit curve for firm 1.,y2,y1,y2,y1,Iso-Profit Curves for Firm 1,Q: Firm 2 chooses y2 = y2.Where along the line y2 = y2 is the output level thatmaximizes firm 1s profit? A: The point attaining thehighest iso-profit curve for firm 1. y1
15、is firm 1s best response to y2 = y2.,y2,y1,y2,y1,Iso-Profit Curves for Firm 1,Q: Firm 2 chooses y2 = y2.Where along the line y2 = y2 is the output level thatmaximizes firm 1s profit? A: The point attaining thehighest iso-profit curve for firm 1. y1 is firm 1s best response to y2 = y2.,y2,R1(y2),y2,y
16、1,y2,R1(y2),y2”,R1(y2”),Iso-Profit Curves for Firm 1,y2,y1,y2,y2”,R1(y2”),R1(y2),Firm 1s reaction curvepasses through the “tops” of firm 1s iso-profitcurves.,Iso-Profit Curves for Firm 1,y2,y1,Iso-Profit Curves for Firm 2,Increasing profitfor firm 2.,y2,y1,Iso-Profit Curves for Firm 2,Firm 2s reaction curvepasses through the “tops” of firm 2s iso-profitcurves.,y2 = R2(y1),Collusion,Q: Are the Courno
