Summary
Summary of the book: Introduction to Industrial organization by Luis M.B. Cabral
- Course
- Institution
- Book
Summary of the relevant chapters for the course Micro 3: Industrial economics
[Show more]
Connected book
Book Title:
Author(s):
- Edition:
- ISBN:
- Edition:
Seller
Follow
irisveldman1998
Reviews received
Content preview
H1Industrial organization is concerned with the workings of markets & industries, in particular, the way
firms compete with each other
H4
Game: model that depicts a situation of strategic behavior
Games may be presented in normal form (matrix) of in extensive form( game tree)
Simultaneous strategy: players choose at same time
Nash-Equilibrium: a situation such that no player would unilaterally find it optimal to change strategy
Sequential game: solved backwards
Committing to take future action which is ex-post suboptimal may have an ex-ante strategic value
H5
Degree of monopoly power inversely related to the demand elasticity faced by the firm
High-power regulation mechanism provides strong incentives for cost reduction but few incentives
for quality provision
Natural monopoly: 1 firm producing cheaper than multiple
−δDD
p−mc 1 ∗p
Elasticity rule: = δDp
p ∈ ∈=
q
H6
Perfect competition assumptions:
- Atomicity
- Product homogeneity
- Perfect information
- Equal access
- Free entry
Perfect competition: implies maximum efficiency in a static sense, for a given set of available
technology
Equilibrium under competitive selection is efficient
Equilibrium profits under monopolistic competition are zero, but firms don’t produce at minimum of
average cost
H7
, Bertrand model: firms compete with prices
Best response function (reaction function) is a function p i*(pj) that gives, for each pj, I’s optimal price
In Bertrand both firms have p=mc
In Bertrand, there is no product differentiation
In Bertrand, there is no dynamic competition
In Bertrand, there are no capacity constraints
If total industry capacity is low in relation to market demand then equilibrium price > marginal costs
Cournot model: firms compete in quantities
Residual demand: Gives all possible combinations of firm 1’s quantity & price for given value q 2
Perfect competition output > duopoly output > monopoly output
Monopoly price > duopoly price > perfect competition price
If capacity & output can easily be adjusted, then the Bertrand model is a better approximation of
duopoly competition. If, by contrast, output & capacity are difficult to adjust, then the Cournot
model is a good approximation
An increase in marginal costs implies a downward shift of the reaction curve
a−c q2
q 1∗( q 2 )= −
2b 2
a+2 c
P N =a−b Q N =
3
N a−2c 1 +c 2
q1 =
3b
N N N 2 a−c 1−c 2
Q =q1 +q 2 =
3b
q1 a−2 c1 +c 2
s1= = Market share
q 1+ q2 2a−c 1−c2
N N a+c 1+ c 2
P =a−b Q =
3
H8
1 m 1 m 21 m
π +δD π +δD π No deviation from collusion
2 2 2
1 1
V = πm V ' =π m Payoff optimal deviation
2 1−δD
δ> ½ : collusion possible
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller irisveldman1998. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $3.21. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
53920 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now