Short run
Medium
run
Long run
Product
choice
Research &
development
Price
Determination of
cost & capacity
Norwegian air fares since the opening of OSL
Incomplete
information
Imperfect information
Complete information
Perfect information
“Almost
perf.” info.
Normal
form
games
Static
Dynamic
Bayesian
games
a2
R1
a2
R2
Extensive form
games
(the general case)
Extensive form
games
(multi-stage games)
a1
a1
Strategic substitutes
a2
p
R1
p
R2
a2
P (Q )
pm
p
c
MR
a1
Strategic complements
a1
Q
D( p)
Q
Demand
1
R1
p2
pm
q2
R1
R2
q2
p2  c
R2
p1  c
pm
p1
q1
q1
Price competition with homogeneous products
Observations about Cournot competition
Quantity competition with homogeneous products
Characterization of Cournot competition
marginal revenue
• Best response curves have negative slope
• Each firm has market power (P(Q)  P(Q)  P(Q) qi)
• Cournot’s ”reaction
story” is stabile.
• Reduced c1 shifts 1’s
curve outwards.
• Outcome lies between monopoly and perfect comp.
qq22
• Difference between price and marginal cost is reduced
when the demand becomes more elastic.
• Reduced c1 leads to increased q1 and reduced q2.
qq11
• Reduced c1 leads to a direct and indirect advantage
for 1 and an indirect disadvantage for 2.
• Each firm’s difference between price and marginal cost is
proportional to its market share.
• A firm’s market share depends of its efficiency.
• Even less efficient firms ”survive” with positive market share.
q2
Intermediate capacity
Large
capacity
Intermediate
capacity
Intermediate
capacity
p
Efficient rationing
R10
Intermediate
capacity
p2
R1
Small
capacity
p1
Q
q1
q2
R2
Intermediate
capacity
R20
q1
Bertrand-Edgeworth model
Capacity competition followed by price competion yields Cournot outcomes
2
p
p
Small capacity
Intermediate capacity
p1  P (q1  q2 )
p1  P (q1  q2 )
Q
q1
q2
0
2
R (q1 )
Q
q1
q2
R20 (q1 )
3