ECON101 Lecture Notes - Lecture 12: Perfect Competition, Oligopoly, Nash Equilibrium

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browncrocodile545

24 Nov 2018

School

University of Waterloo

Department

Economics

Course

ECON101

Professor

Corey Van De Waal

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ECON101 Full Course Notes

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A game like the prisoners" dilemma is played in duopoly. Collusive agreement: an agreement between two (or more) firms to restrict output, raise the price, and increase profits illegal. Firms in a collusive agreement operate a cartel. Strategies that firms in a cartel can pursue are to: comply or cheat. Two strategies, so there are 4 possible actions for the firms: both comply or both cheat, a complies and b cheats or a cheats and b complies. Firms in a cartel act like a monopoly and maximize economic profit. To find the profit, set the cartel"s mc = mr. If there is a successful collusive agreement in a duopoly to maximize profit, the price will be the monopoly price. Cartel"s mc curve is the horizontal sum of the mc curves of the two firms (mci is mc for the cartel/industry) Maximized economic profit: quantity at mci = mr. If one firm increases output, its profit also increases.

Related Questions

2. Deviating from the collusive outcome

Mays and McCovey are beer-brewing companies that operate in a duopoly (two-firm oligopoly). The daily marginal cost (MC) of producing a can of beer is constant and equals $0.80 per can. Assume that neither firm had any startup costs, so marginal cost equals average total cost (ATC) for each firm.

Suppose that Mays and McCovey form a cartel, and the firms divide the output evenly. (Note: This is only for convenience; nothing in this model requires that the two companies must equally share the output.)

Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and combined quantity of output if Mays and McCovey choose to work together.

Monopoly Outcome PRICE (Dollars per can)QUANTITY (Thousands of cans of beer)DemandMRMC = ATC

When they act as a profit-maximizing cartel, each company will producecans and chargeper can. Given this information, each firm earns a daily profit of, so the daily total industry profit in the beer market is.

Oligopolists often behave noncooperatively and act in their own self-interest even though this decreases total profit in the market. Again, assume the two companies form a cartel and decide to work together. Both firms initially agree to produce half the quantity that maximizes total industry profit. Now, suppose that Mays decides to break the collusion and increase its output by 50%, while McCovey continues to produce the amount set under the collusive agreement.

Maysâs deviation from the collusive agreement causes the price of a can of beer to toper can. Mays's profit is now, while McCoveyâs profit is now. Therefore, you can conclude that total industry profit when Mays increases its output beyond the collusive quantity.

limedog21

Suppose there are two firms (firms 1 and 2) producing good X. Firm 1 has a marginal cost of $10 per unit
of X produced, while firm 2 has a marginal cost of $20 per unit of X produced. Suppose the two firms
decide to form a cartel and have the following collusive agreement: each firm will produce q = 30. In this
case, Q = q1 + q2 and that firms always receive the same price P at any given time. (10 marks)
a) What profit will each of the firms receive at the cartel agreement? (2)
b) Does either firm have an incentive to cheat (by increasing output to q = 40)? (2)
c) What is the Nash Equilibrium in this case? (3)
d) Is there anything Firm 2 can do to keep both firms producing according to the cartel agreement? (3)
Hint: Compare the profits Firms 1 and 2 earn in the cartel agreement and the Nash. Think back to the
Coase Theorem we looked at a few weeks ago…

maroonarmadillo294

In a monopolistically competitive market, the rule for maximizing profit is to set MR=MC, which means

Price is higher than marginal revenue

Price is equal to marginal cost

Price is equal to marginal revenue

Price is lower than marginal revenue

Perfect competition displays________________________ because the social benefits of additional production, as measured by the price that people are willing to pay, are in balance with the _____________________to society of that production

Economic efficiency; marginal revenues

Allocative efficiency; marginal costs

Economic efficiency; total revenues

Allocative efficiency; total costs

How can parties who find themselves in a prisoners dilemma situation avoid the undesired outcome and cooperate with each other

Find effective ways to penalize firms who do not cooperate

Sign legally enforceable contracts setting out their mutual agreement to act like a monopoly

One oligopoly can physically beat up another oligopoly

By seeking alternatives to create pressure for members to keep output up and prices up

In the framework of an oligopoly, what strategy can work like a silent form of cooperation

Always match other cartel firmsï¿½ price cuts, but donï¿½t match price increases

Immediately match price increase

Legally enforcement agreements

fuchsialocust206

ECON101 Lecture Notes - Lecture 12: Perfect Competition, Oligopoly, Nash Equilibrium

ECON101 Full Course Notes

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