Lecture 11

McPeak

Lecture 11=

PPA 723

Monopsony.<= /p>

There is only a singl= e buyer in a market, and this single buyer chooses the price quantity pair from the supply curve.

It buys at a price be= low what the price would be in a competitive market.

Supply curve is of th= e input, the demand curve is the demand of the monopsonist.

Without getting into = the details, it is conceptually similar to the monopoly case, though the focus = is on the supply curve / marginal expenditure curve rather than the demand cur= ve / marginal revenue curve.

Know there is a conce= ptual distinction.

S= trategic interactions and Game theory.

Game theory is a tool= to understand why outcomes with higher payoffs may not be possible to obtain if each individual acts in his or her own best interest.

How we understand why= a failure to coordinate actions when there are strategic actions leads us to = an outcome that does not maximize welfare of the decision makers.

A set of strategies i= s a Nash equilibrium if, holding the strategies of all other players constant, no pl= ay can obtain a higher payoff by choosing a different strategy.

Each firm is playing = a best response strategy.

C= hicken game.

Best response strateg= y lists out the options.

I= f LFG swerve, KB straight.

If LFG straight, KB s= werve.

I= f KB swerve, LFG straight.

If KB straight, LFG s= werve.

Neither option is dom= inant as a pure strategy.

P= risoner’s dilemma.

B= oth quiet, lesser charge.

One squeals, gets let= off, gives evidence on other so that they face a higher cha= rge.

Both squeal, medium c= harge.

If I squeal, you sque= aling is BR.

If I am quiet, you sq= uealing is BR.

If you squeal, me squealing is BR.

If you are quiet, me squealing is BR.

Say it is a question = of entering a market.

Ford / GM example

If GM enter, F enter.

If GM plays not enter= , F enter.

If F enter, GM don’t enter.

If F plays not enter,= GM enter.

Ford enters, GM does = not.

Say it is the choice = of a level of quantity to provide.

U= A AA example.

If UA chooses 64, AA = chooses 64.

If UA chooses 48, AA = chooses 64.

If AA chooses 64, UA = chooses 64.

If AA chooses 48, UA = chooses 64.

If they could coordin= ate, then they could offer a lower quantity and earn higher profits.

Note collusion on sup= ply and demand graph.

Detection as a preven= tative means.

Inspection of each other’s books.

Price matching ex post.

Tracers in products.

Types of oligopoly solutions:

1)&n= bsp; Cournot quantity setting oligopoly. Each firm chooses output level as = a best response to the other firms’ strategies.

2)&n= bsp; Stackelberg quantity setting oligopoly. One firm has first mover status in= a quantity setting game.

3)&n= bsp; Bertrand pr= ice setting oligopoly. Each firm selects price as a best response to the other firms’ strategy.

Math appendix to cont= rast market structure:

If the market is perfectly competitive:

Supply equals demand.= , where i is each individual firm.

If we have Cournot oligopoly competition (say 2 firms)

R=3D339q₁-q₁²-q₁₌q₂

MR=3D339-2q₁-q₂

MC=3D147

MR=3DMC implies 339-2q₁-q₂=3D147= , or q₁=3D96-.5*q₂

If firms are symmetric, q₁=3D96-.5*(96-.5* = q₁), or q₁=3D96-.5*(96-.5* q₁),

or q₁=3D96-48+.25* q₁, or .75* q_{1=3D48,
or q₁=3D64.}

Both produce this level, so total quantity is 64+64, or 128. This implies price is 21= 1.

Profit for each firm is thus 211*6= 4-147*64, or 13504-9408, or 4096.

CS can be calculated as 8192, PS is 8192, total welfare is 16384.

If Stackelberg (give firm 1 first mover status).

Firm one knows firm two is reacting to one’s dec= isions by q₂=3D96-.5*q₁

So plug this in:

R=3D339q₁-q₁²-q₁₌*(96-.5*q₁), =3D243q₁-q₁²-96*q₁+.5* q_{1<=
/sub>²=3D243*q₁-.5*
q₁²}

MR=3D243- q₁

MC=3D147, so if MR=3DMC, q_{1=3D96. This then implies that q2}=3D96-.5*(96), or 48.

Profit for firm one is 4,608, profit for firm two is 2304, total of 6912. CS =3D 10,368.

Total welfare is 17,280.

If a monopoly= ,

Bisection rule gives us MR=3D339-2*q, and MC =3D 147.<= /p>

Monopoly q =3D 96, Monopoly p =3D 243.

Profit is 9216,

CS=3D4464

Total welfare is 13,680

General rule:

Welfare and quantity are highest in perfectly competit= ive market, lowest in monopoly.

Oligopoly of different forms lies in between.

	Q	P
Monopoly	96	243
Cournot	128	211
Stackelberg	144	195
Perfect Competition	192	147