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OLIGOPOLISTIC MODEL OF COMPETITION where the payoff of firms are dependent…

- - - - DIFFERENT
        
        PRICE WILL BE SLIGHTLY LOWER THAN THE HIGHER MC the firm with the lower MC will gain the ENTIRE market share
      - SAME
        
        BERTRAND PARADOX similar to prisoner's dilemma; both firms will charge at MC and earn zero profit (as long as one firm's price is above MC, the other will always have incentive to undercut to capture the market)
- - - - WHY?
        
        FIRM AIMS TO MAXIMISE PROFIT (not to increase market share) if firm 2 increases quantity following firm 1's price increase, the market price may be depressed thus lowering profit.
  - - - UNDIFFERENTIATED GOODS
        
        PRICE ABOVE MC BUT BELOW MONOPOLY PRICE
- - - - BACKWARD INDUCTION
        
        FIND THE FOLLOWER'S BEST RESPONSE FUNCTION that maximises Firm 2 profit (MR=MC)
        
        FIND LEADER'S RESIDUAL DEMAND CURVE by substituting the BRF into the demand curve and solve the quantities that gives the maximum profit (MR=MC)
- - - - BERTRAND COMPETITION assumes that all goods are IDENTICAL and therefore consumers will always choose the one with lowest price.
        
        NOT REALISTIC
        
        GOODS WILL STILL HAVE SLIGHT DIFFERENCES thus, not ALL consumers will choose the one with the lowest price
        
        SALESPERSON (SERVICE)
        
        SHOP DISTANCE
        
        PACKAGING
    - - RIVAL PRICE positive coefficient; increase in rival's price, positive effect on demand
        
        MAGNITUDE=0
        
        DEMAND DOES NOT DEPEND ON THE PRICE OF THE OTHER GOOD
      - OWN PRICE negative coefficient; increase in own price, negative effect on demand
      - LARGER THE MAGNITUDE OF THE COEFFICIENT; LARGER THE EFFECT OF A CHANGE IN PRICE
      - DIFFERENCE IN