Temple University Department of Economics

Temple University
Department of Economics

Economics 201
Microeconomics and Behavior

Imperfect Competition - Chapter 13

I. Overview
    A. Oligopoly - few sellers interacting strategically
    B. Monopolistic Competition
        a. many firms
        b. differentiated products
        c. easy entry - easy exit

II. Oligopoly
    A. Cournot duopoly
        i. Firm 1 takes the other's output as given
        ii. Given Q2, work with 1's residual demand curve
        iii. Set MR = MC and solve for 1's output in terms of Q2
        iv. Repeat, but switch roles
        v. Solve the two "reaction curves"
        vi. Each firm gets 1/3 of competitive output
    B. Bertrand duopoly
        i. firm chooses price assuming other's price is fixed
        ii. consumers buy only from the low price firm
        iii. each firm cuts price to marginal cost
        iv. firms share the competitive output equally
    C. Stackelberg duopoly
        i. one leader, one follower
        ii. The leader believes the follower behaves like a Cournot duopolist
        iii. The outcome is that the leader ignores its own Cournot reaction function, or risks spiraling to the Cournot solution, which is worse
    D. Comparison of outcomes

Comparison of Oligopoly Models
Model	Industry Output	Market Price	Industry Profit
Shared monopoly	Q_m = a/(2b)	P_m = a/2	= a²/(4b)
	^	v	v
Cournot	(4/3)Q_m	(2/3)P_m	(8/9)
	^	v	v
Stackelberg	(3/2)Q_m	P_m	(3/4)
	^	v	v
Bertrand	2Q_m	0	0
	\|\|	\|\|	\|\|
Perfect Competition	2Q_m	0	0

III. The Theory of Strategic Behavior
    A. Player 1 chooses her best course of action given a conjecture about the opponent's behavior.
    B. Where there is a coincidence of conjectures we have an equilibrium. This notion of equilibrium does not imply that the outcome is best either individually or severally, only that the participants will not change their strategy once the see the strategy chosen by the opponent.
    C. Methods for solving games of strategic interaction
        i. Dominant strategy
        ii. Elimination of dominated strategies
        iii. Best response
    D. Bertrand again - If they could collude to set price at P_m then they each get half of . But the dominant strategy is to defect and drive the price to P = MC. This is also a Nash equilibrium.
    E. Cournot again - Each firm's reaction function is a dominant strategy. Where they intersect is a Nash equilibrium.
    F. Stackelberg again - The solution to Stackelberg is a Nash equilibrium, although Leader does not use a dominant strategy. Once he sees Followers output, Leader would like to revise its output, but doesn't do so since the result is to spiral on to the less desirable Cournot solution.