Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Chapter 10 Strategic Price Setting

Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Figure Price-Setting Game (profits in millions of dollars)

Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Figure Trigger Pricing

Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Figure Solving for Profit-Maximizing Quantity for a Single Firm with N competitors Model Setup: N identical firms with identical marginal cost c; market demand curve P = a – b(Q) where Q is total production by all firms. Solve for q A *: Set marginal revenue and marginal cost equal MR=[a-(N-1)bq]-2bq A * = c; Use the Nash Equilibrium condition that q A * = q; all firms produce the same output. [a-c] = 2bq+(N-1)bq = 2bq+Nbq-bq =(N+1)bq Thus, in Cournot-Nash Equilibrium: q = (a-c)/[b(N+1)] The market output (output by all N firms) and market price is then Q = Nq = [N/(N+1)][(a-c)/b] P = a – [N/(N+1)](a-c)

Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Figure Cournot Price as Number of Firms Rises (a=$100; b = $1; c = $10) Number of Firms (N) Cournot Price: P = a – [N/(N+1)](a-c) a = $100; c = $10 Cournot Quantity for Each Firm q=(a-c)/[(N+1)b] Market Output Q = Nq Profits Per Firm (P-c)(q) 1, monopoly$ *1 = 11.25($55-$10)(11.25) = $ , duoply$ $ , oligopoly$ $ , oligopoly$ $ , oligopoly$ $ , perfectly competitive market $ $0.20

Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Figure Cournot Realism Ratio Number of Firms ( N )Cournot Realism Ratio = (actual output) / (output predicted from Cournot Model) 2, duoply , oligopoly , oligopoly , oligopoly1.050 Source: Huck, Normann, and Oechssler.

Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Figure Three Outcomes of Oligopolistic Competition

Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Figure Predatory Pricing Game (incumbent profits, competitor profits)

Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Figure Advertising Game (profits in billions of dollars)

Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. High Quality Beer Low Quality Beer Coors Budweiser Figure Beer Quality Game (profits in billions of dollars) $10 $20 $5 $20 $15 Low Quality Beer