MICREC MIDTERM 2 REVIEWER

COURNOT (output-based, simultaneous) BERTRAND (price-based) STACKELBERG (Q-based, leader)

FOC The ORF of each firm satisfies the FOC for a maximum DIFFERENTIATED HOMOGENOUS [coming from COURNOT-homogenous]
MRi  MCi qi (q j ) The PRF of each firm satisfies the FOC for a Given the 2 firms have identical products
As leader, Firm i is assumed to know and
profit for where can estimate the follower firm’s (Firm j)
Ri  ( p ( q1  q2 )) dCi ( qi ) MRi  MCi pi (p j ) Ci
maximum profit for and cost functions =__, then q
MRi   MCi  ORF: j =__. Firm i’s profit maximizing
qi qi dqi Ri  ( pi  qi ( p1 , p2 )) dCi ( qi )
, , MRi   MCi  output (given Firm j’s output) satisfies
q j pi pi dqi the FOC for a maximum profit
where , =__ and the FOC must
0 MRi  MCi
qi i  1, 2 i j Ci dCi qi ( p1 , p2 ) satisfy p=MC
and assuming and MCi   
HOMOGENOUS DIFFERENTIATED pi dqi pi
, and
p (Q ) The residual pi (qi , p j ) p1 to p2 p j - We substitute Firm j’s ORF to Firm i’s
demand curve of - If , sub 0 market demand curve p= __ to get
either firm is p = pi (Q) assuming
pi i  1, 2 and
i j Firm i’s residual demand curve
and vice versa to get
___ p  p (q j )
Q  q1  q2
where Ri  pqi Ri 
p1 (Q ) p2 (Q ) - Since , then __
- Since =_, =_ Ri
ORF Ri  pqi pi qi R1 , R2  qi Ri  pi qi R1 , R2  MRi  
PRF Since or , _  - Since =_, , __ qi
-  ___
Ri Ri
MRi   MRi   dCi
qi pi C C MCi 
 _. Given 1 =__ and 2 =_, Ci dqi
- Since =__, =__
dCi Ci dCi qi ( p1 , p2 )
MCi  MCi   
C1 =__ C2 =__, dqi pi dqi pi
Since and =__. Solving 
MRi  MCi q1 ( q2 ) and
for the FOC/s: to get
MRi  MCi
q2 (q1 ) - PRF: Solving for the FOC/s: to

qi We substitute Firm 2’s ORF to Firm 1’s ORF to get p (p ) p (p ) Therefore, the Bertrand equilibrium price MRi MCi qi
get 1 2 and 2 1
*
q1 * , q1 * to for each firm is p1 = p2 = MCi =__ Equating, and  *. We
- We substitute Firm 2’s PRF to Firm 1’s PRF to
then substitute Firm 2’s ORF to get qi q
q2 * p1 * p1 * Since p = ___ and p1=p2=[value of substitute * to Firm j’s ORF to get j
get , then substitute to Firm 2’s
MC]=p, then [value of p] = ___  Q = __ *
pi We substitute q1 * and q2 * p2 * . p1 * is the total market output. Since the 2 firms sell identical products,
PRF to get We substitute and
* We substitute to
q1 * and q2 * to p2 * q1  _ and q2  _ to get q1 *
they sell at the same equilibrium price,
p1  __ p2  ___ to and Since prices are the same, the 2 firms q1 *
p=__ where and to get which is obtained by substituting
p1 * and p2 * q2 * qi Q/2=
Q  q1  q2 divide the market equally, q1 * to p=__ where Q  q1  q2
to __ for i = 1,2 and
get p*
i Ri ( qi )  Ci ( qi )  pqi  C i ( qi ) or pi qi  Ci ( qi )  i  Ri (qi )  Ci ( qi )  pi qi  Ci ( qi ) Given identical Cs, p’s and q’s, then  i  R ( q )  C ( q )  pqi  Ci ( qi )
i i i i

  1   2 i  R ( q )  C ( q )  pqi  Ci ( qi ) =0   1   2
  1   2 i i i i

CS Q Q Q

 p (Q) dQ  pQ CSi   pi (Q)dqQ  pi qi CS   p (Q)dQ  pQ

0 0 0
Q  q1  q2
wh where
where
 Q  q1  q2 Q  q1  q2
ere
PSi pqi  VC ( qi ) PSi  pi qi  VC ( qi ) PSi  pqi  VC (qi )
W W = CS + PS or CS + PS = CS1 + CS2 + PS1 + PS2 W = CS + PS
CS1