This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Non-Cooperative Oligopoly  “Few” Firms  Product Types Identical Chapter 6 Heterogeneous Chapter 7  No Entry  Firms pick price or quantity only

This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Non-Cooperative Game Theory  2 or more players maximizing individual payoffs  Each firm is aware of the other’s decision and the way those decisions affect proft.  Nash Equilibrium Cournot Equilibrium: Nash in quantity choice Bertrand Equilibrium: Nash in price choice

This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Cournot Equilibrium  No entry  Homogeneous products  Single period  Demand Example: Q = p  Cost of firm I =.28*q i (i = 1,2)

Figure 6.1 This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. MC = $.28 Market Demand: Q = P Residual Demand: q 1 = P Output Residual Marginal Revenue $1 P

This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Finding Firm 1’s best response Reaction functions are also called: Best Response Functions

This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Finding Firm 2’s best response

This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Graphing the Reaction Functions

This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Calculating Cournot Equilibrium

This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Cournot Vs. Monopoly  For our example Demand: Q = p Cost =.28*q

This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Cournot Vs. Competition  For our example Demand: Q = P Supply: P =.28

Figure 6.3 This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Profit Possibility Frontier Stackleberg Cournot Efficient Point, Bertrand

This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Cournot with n-firms  Firm’s output = 720/(n+1)  Industry output = 720n/(n+1)  Price = 1/n +.28  Profit of firm = 5.184/(n+1) 2

This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Bertrand Equilibrium  For our example Demand: Q = p Cost =.28*q  What is demand for firm 1?

This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Stackleberg Leader-Follower

This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Stackleberg Calculations  Maximize Firm 1’s profit given that firm 2 will follow the rule: q 2 =360 – q 1 /2.

Multi-period Game Complexities This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill.  Simultaneous move games  Single period  Super games  Finitely repeated games  Sub-game perfection

This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Cournot: One Period vs Supergame Firm 1 Firm 2 $57.6 $72.00$64.80 $ $57.6 $54.00$64.80 $72.00

Experimental Evidence  Plott (1982) Cournot, Competitive Equilibrium, and joint profit maximum predict price well Which is better depends on exact setup  Lave (1962) 2 period, 2 person, multi-period prisoner’s dilemma, no formal communication: joint profit maximum best predictor.  Holt (1985) Tri-opoly, repeated 25 times: Outcome between Cournot and Joint profit maximum Tri-opoly, one-shot only: Cournot Outcome closest This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill.