Easy- Trade Under Imperfect Competition (focus on cournot graph) Flashcards
What does imperfect competition allow firms to do and why?
set their own price, since produce differentiated goods
What do models with imperfect competition typically feature what kind of trade.
Intra-industry trade
Intra-industry trade features (2)
b) gains from trade arise from (3)
Trade between similar countries and identical/similar goods.
Cost differences not required for gains from trade (since differentiation)
b)
increased competition, EOS or variety
Monopoly model;
Linear inverse demand: expression
Pa = α − βQ
Q is total output sold in the country
Domestic firm has constant MC of c
In autarky, the firm is a monopolist in its own country, hence Q =qa
How to find quantity qa:
b) once we have qa we can find edited Pa:
start with TR = Pa qa (price x totalquantity in country)
sub the linear demand expression in (Pa= α+βQ)
Then differentiate to get MC. answer to that = c.
rearrange to make Qa subject to get:
Qa = α-c / 2β
b) sub in qa = α-c / 2β into Pa
then follow working pg6 to get:
Pa = α+c/2
Monopoly diagram
b) (try work out Qa and Pa if under perfect competition too)
Simple A level diagram
MC = MR
b) Qa = a-c/β
Pa = c
If country A opens to trade with country B, the outcome depends on what? (2)
Depends on the market structure in country B…
(If country b is perfect competition, outcome depends on MC!
If country B is a monopolist, outcome depends on whether cournot or bertrand competittion!)
Imp:
Under perfect competion, outcome if
B) diagram (if country B MC is the same as A)
C) diagram if country B MC < domestic MC
D) diagram if country B MC>domestic MC
Outcome depends on productivity (MC!!!)
B) A must also set P=MC and at the perfectly competitive quantity (pg 12)
C) foreign P=AR is lower than A so takes all country A’s demand. (pg 13)
D) domestic firm remains a monopolist. If MC is lower than the monopoly price, the domestic firm will set a price just below Cb to capture the entire market. (right side diagram pg 14)
Scenario 2:
If country B has a monopolist identical to country A, (duopoly) what does the outcome depend on
Whether they compete under bertrand or cournot competition
Bertrand competition for duopoly
B) what happens if they charge same price
Set prices simultaneously (same time). Consumers want lowest price.
If both charge the same price, consumer demand is split evenly between them
Hence what is Bertrand competition the same as
Perfect competition, since competitive price is a Nash equilibrium i.e are competing on price
Cournot competition
Quantity setting - choose simultaneously and then produce according to others residual demand (where BRs intersect) act as monopolist (set MC=MR)
Deriving Cournot competition:
Recall Pa = α - βQ
Q = qa + qb
Find c, and rearrange to then find qa!
B) how do we find qb?
- Find TRa = PaQa by subbing Pa in
- Differentiate to find MRa
Then set MC=MR to get answer equal to c (MC)
Then rearrange to find qa!
B) qb will be exactly the same but qa not qb in formula
Final result in diagram
Y axis - Qa
X axis Qb
Best response function - equilibrium is where their reaction functions intersect. (They produce according to the others residual demand)
Nash equilibrium outputs are???
b) given this what is total output (Q)
c) given (b) what is price
qa = qb = α-c/3β
b) since Q = qa+qb
2(a-c)/ 3β
c) Pa= α - βQ
α+2c/3
