1. Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Chapter 10 Strategic Price Setting

2. Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Figure 10.1. Price-Setting Game (profits in millions of dollars)

3. Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Figure 10.2. Trigger Pricing

4. Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Figure 10.3. 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)

5. Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Figure 10.4. 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$5511.2511.25*1 = 11.25($55-$10)(11.25) = $506.25 2, duoply$407.5015.00$225.00 3, oligopoly$335.6316.88$126.57 4, oligopoly$284.5018.00$81.00 5, oligopoly$253.7518.75$56.25 100, perfectly competitive market $110.2322.28$0.20

6. Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Figure 10.5. Cournot Realism Ratio Number of Firms ( N )Cournot Realism Ratio = (actual output) / (output predicted from Cournot Model) 2, duoply0.927 3, oligopoly1.027 4, oligopoly1.029 5, oligopoly1.050 Source: Huck, Normann, and Oechssler.

7. Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Figure 10.6. Three Outcomes of Oligopolistic Competition

8. Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Figure 10.7. Predatory Pricing Game (incumbent profits, competitor profits)

9. Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Figure 10.8. Advertising Game (profits in billions of dollars)

10. Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. High Quality Beer Low Quality Beer Coors Budweiser Figure 10.9. Beer Quality Game (profits in billions of dollars) $10 $20 $5 $20 $15 Low Quality Beer