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OLIGOPOLISTIC MODEL OF COMPETITION where the payoff of firms are dependent…
OLIGOPOLISTIC MODEL OF COMPETITION where the payoff of firms are dependent on the strategic of the firm as well as its competitors
BERTRAND PRICE COMPETITION 1. set the price firm wishes to sell at 2. produce to satisfy demand. Note: the firm with lower price will capture the entire market
NATURE
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STRATEGIC COMPLEMENTS strategic moves of both firms are positively related; when firm 1 decrease in price, firm 2 will decrease in price as well
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PRICE
MARGINAL COST (LOWER BOUND) no firms will choose to sell below their own marginal cost as that will mean making losses (negative profits)
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)
MONOPOLY PRICE (UPPER BOUND) in the case where other firms are priced out(due to overcharging) the remaining firm will act like a monopoly. Thus, no firms will choose to charge above Monopoly price.
COURNOT QUANTITY COMPETITION 1. set the quantity firm wishes to produce 2.set whatever price is necessary to CLEAR THE MARKET (according to demand) Note: Therefore the profit function of Firm 1 Firm 2's quantity.
NATURE
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STRATEGIC SUBSTITUTES strategic moves of both firms are negatively related; when firm 1 increases in quantity, firm 2 will decrease in quantity.
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.
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QUANTITY
BEST RESPONSE FUNCTION (REACTION FUNCTION) each firm’s optimal level of production is the best response to the level it expects its rival to choose
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STACKELBERG LEADERSHIP 1. A leader chooses the quantity first(according to the follower's best response function) 2. The follower will then make its choice (which is the best response to leader's choice
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PRODUCT DIFFERENTIATION when you see this, you MUST mention IMPERFECT SUBSTITUTES
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