8 Oligopoly - Luiscabral.net

Figure 8.9
Cournot equilibrium after increase in marginal cost (N ′ )
45 ◦
. .
N ′ q ∗ 2(q 1 )
• •N
q ∗ 1(q 2 )
̂q 1
̂q 2 q M ′
q M q C ′
q C
q 1
.... .... .... .... .... ... .... ... ... ... ... .... .... .
.......
q 2
. .
Total output is therefore
̂Q = 2 a − c
3 b
Substituting in the demand function, we obtain equilibrium price:
We thus have
̂p = a − b ̂Q
= a − b 2 a − c
3 b
= a + 2 c
3
d ̂p
dc = 2 3
In economics jargon, we say that the pass through rate is 2 3
≈ 66%. To put a dollar value
on the price change, note that an 80% increase in fuel costs implies a 80%×50%=40%
increase in marginal cost, or a 40% × 300 = $120 increase. This increase in marginal cost
is experienced by both firms. It follows that price increases by 2 3
120 = $80.
(2)
Exchange rate fluctuations and market shares. Consider a duopoly with two different
firms from two different countries. For example, two producers of microchips, one in Japan
(Firm 1) and one in the U.S. (Firm 2). The market for microchips is in US$ (that is, all
sales are made in US$). However, the costs of the Japanese firm are paid in Japanese Yen.
(The American firm’s costs are in US$.)
Suppose that firms compete à la Cournot. In fact, this is one case where the reducedform
interpretation of the Cournot model seems appropriate: firms set production capacities
and then set prices (given capacities), the result of the two-stage game being identical to
Cournot competition.
In an initial equilibrium, both firms have the same cost and the market is divided equally
between the two. Moreover, equilibrium price is p = $24. One question which comparative