In this topic we try to answer the question: “Will profits in reality be higher or lower than under Cournot?”. We begin by reminding ourselves of the origins of Cournot competition, and then go on to analyse collusion in dynamic oligopoly, and repeated games.
Note that since we did not cover any of these slides in week 4, the class and lecture from week 4 are placed under topic 3.
In this topic we go further into the consequences of Bertrand and Cournot competition, and we investigate the links between the two.
In this topic, we start with a game theory refresher, and then we move on to take a fresh look at Bertrand and Cournot oligopoly.
Note that in my rush to get through those Bertrand examples, I may have slightly mislead you about the fourth and fifth ones.
To recall, the fourth one had costs of 100, 102 and 104. There is certainly an equilibrium with prices of 101, 102 and 102 or higher, as I said in the lecture. But there’s also an equilibrium with 102, 103 and 103 or higher, as firm 2 doesn’t want to deviate down since at 102 they’re also making zero profits. As someone pointed out after the lecture, with completely inelastic demand, 102, 102, 103 is also an equilibrium, as getting half the market with 2 pounds profit per unit gives the same profits as getting the whole market with 1 pounds profit per unit. But with normal downwards sloping demand, 102, 102, 103 will not be an equilibrium, as demand at 102 will be lower than demand at 101, making 101 a profitable deviation for firm 1 (so it’s normally safe to ignore this equilibrium).
See the class for more information.
Tirole has made many huge contributions to the field of Industrial Organisation that we’re studying this semester. I know I’m a bit late on this as I’ve been away, but here’s a nice summary of why Tirole deserved to win the prize.
We’ll be seeing some of his work later in the Industrial Organisation course, and this perhaps gives you an additional reason to consult his excellent textbook.
For more information, read this non-technical introduction to his work, or this more comprehensive one.