Microeconomics I partie 2/9

Since the profit maximization equation, derive and get the output decision with MR = MC, then write the best reponse function

Simultaneous quantity setting
Few firms producing homogeneous or differentiated products (typically, we will look at two firms producing identical products)
After the output decisions, price adjusts according to the demand function (in case of homogeneous products, p = p(q) where
q = q1 + q2)
Game between the firms where each firm maximises its profits given the output of the other firms

Small number of sellers with relatively high market shares

Price-making sellers

Sellers behave strategically (i.e. firms recognise their interdependence)

Many small, price-taking buyers

Each firm faces a downward-sloping demand curve for its product
Firms compete for customers in terms of both price and the kind of
products they sell

Large number of firms selling differentiated products

Free entry and exit

Firms selling similar but not identical products
! they may be able to raise their price
! the more a product is differentiated from the other products, the more monopoly power the firm has

demand curve facing any one of the firms is essentially flat (i.e. each firm must sell its product for whatever price the other firms are charging)

Student discounts, senior citizens’ discounts etc.

I ‘Non-linear pricing’
I Quantity discounts
I Quality differentiation (first class vs second class...)
I High deductible and low premium vs fuller coverage with higher premium for insurance

Consumers are discriminated according to an unobservable characteristic: their prefereces ! The monopolist gives the consumers an incentive to self select (screening by self-selection)

The monopolist captures all surplus (the monopolist gets the maximum possible gains from trade)
The consumers’ gains are zero
First-degree price discrimination is Pareto-efficient (efficient amount of output is supplied)

output sold to different people at different prices, but every unit sold to a given person sells for the same price

different units of output sold for different prices, but every individual who buys the same amount pays the same price

different units of output are sold for different prices and these prices may differ from person to person

the firm’s technology has economies-of-scale large enough for it to supply the whole market at a lower average total production cost than is possible with more than one firm in the market.

The efficient output level yc satisfies p(y) = MC (y)
Total gains-to-trade is maximized