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Duopoly08.ppt

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F r a n k C o w e l l : M i c r o e c o n o m i c s Duopoly MICROECONOMICS Principles and Analysis Frank Cowell Almost essential Monopoly Useful, but optional Game Theory: Strategy and Equilibrium Prerequisites January 2007 F r a n k C o w e l l : M i c r o e c o n o m i c s Overview... Background Price competition Quantity competition Assessment Duopoly How the basic elements of the firm and of game theory are used. F r a n k C o w e l l : M i
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  F r  a nk  C  o w e l  l   :  M i   cr  o e c o n o m i   c s  Duopoly MICROECONOMICS    Principles and Analysis  Frank Cowell   Almost essential Monopoly  Useful, but optional Game Theory: Strategy and Equilibrium  rerequisites   January 2007  F r  a nk  C  o w e l  l   :  M i   cr  o e c o n o m i   c s  Overview... Background Price competition Quantity competition Assessment Duopoly How the basic elements of the firm and of game theory are used.  F r  a nk  C  o w e l  l   :  M i   cr  o e c o n o m i   c s  Basic ingredients  Two firms: game between them  Issue of entry is not considered.  But monopoly could be a special limiting case.  Profit maximisation.  Quantities or prices?  There’s nothing within the model to determine which ―weapon‖ is used.    It’s determined a priori.    Highlights artificiality of the approach.  Simple market situation:  There is a known demand curve.  Single, homogeneous product.  F r  a nk  C  o w e l  l   :  M i   cr  o e c o n o m i   c s  Reaction  We deal with ―competition amongst the few‖.    Each actor has to take into account what others do.  A simple way to do this: the reaction function .  Based on the idea of ―best response‖.    We can extend this idea…  In the case where more than one possible reaction to a  particular action.  It is then known as a reaction correspondence .  We will see how this works:  Where reaction is in terms of prices.  Where reaction is in terms of quantities.
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