Chapter Twenty-Seven Oligopoly
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 firm's own price or output decisions affect its competitors'profits
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 firm’s own price or output decisions affect its competitors’ profits
Oligopoly How do we analyze markets in which the supplying industry is oligopolistic? Consider the duopolistic case of two firms supplying the same product
Oligopoly How do 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 y units and firm 2 produces y,units then total quantity supplied is y1 y2.The market price will be p(y+y2). The firms'total cost functions are C(y)and c2(y2)
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 supplied 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 2's output level choice y,as given.Then firm 1 sees its profit function as Π1(y1;y2)=p(y1+y2)y1-c1y1) Given y2,what output level y maximizes firm 1's profit?
Quantity Competition Suppose firm 1 takes firm 2’s output level choice y2 as given. Then firm 1 sees its profit function as Given y2 , what output level y1 maximizes firm 1’s profit? 1 1 2 1 2 1 1 1 (y ;y ) = p(y + y )y − c (y )
Quantity Competition;An Example Suppose that the market inverse demand function is p(yT)=60-yT and that the firms'total cost functions are c1(y1)=y7 and c2(y2)=15y2+y2
Quantity Competition; An Example Suppose that the market inverse demand function is and that the firms’ total cost functions are p(yT) = 60 − yT c1 y1 y1 2 ( ) = c2 y2 y2 y2 2 and ( ) = 15 +
Quantity Competition;An Example Then,for given y2,firm 1's profit function is Π(y1y2)=(60-y1-y2y1-y1
Quantity Competition; An Example (y ;y ) ( y y )y y . 1 2 1 2 1 1 2 = 60 − − − Then, for given y2 , firm 1’s profit function is
Quantity Competition;An Example Then,for given y2,firm 1's profit function is Π(y1;y2)=(60-y1-y2y1-yi. So,given y2,firm 1's profit-maximizing output level solves ⊙n=60-2y1-y2-2y1=0. ayi
Quantity Competition; An Example (y ;y ) ( y y )y y . 1 2 1 2 1 1 2 = 60 − − − Then, for given y2 , firm 1’s profit function is So, given y2 , firm 1’s profit-maximizing output level solves y y y y 1 = 60 − 2 1 − 2 − 2 1 = 0
Quantity Competition;An Example Then,for given y2,firm 1's profit function is Π(y1y2)=(60-y1-y2y1-yi. So,given y2,firm 1's profit-maximizing output level solves 卫=60-2y1-y2-2y1=0. ay1 l.e.firm 1's best response to y2 is y1=R1y2)=15-4y2:
Quantity Competition; An Example (y ;y ) ( y y )y y . 1 2 1 2 1 1 2 = 60 − − − Then, for given y2 , firm 1’s profit function is So, given y2 , firm 1’s profit-maximizing output level solves y y y y 1 = 60 − 2 1 − 2 − 2 1 = 0. I.e. firm 1’s best response to y2 is y1 R1 y2 15 y2 1 4 = ( ) = −
Quantity Competition;An Example Firm1's“reaction curve” 60 y1=R1(y2)=15-y2 15
Quantity Competition; An Example y2 y1 60 15 Firm 1’s “reaction curve” y1 R1 y2 15 y2 1 4 = ( ) = −