Industrial Organization

Exam Notes for IO

Competition Policy

Oligopoly

Cournot with identical firms

-Since all firms sell the same product the idea here is that they all have the same price.

-The way this model assumes the market operates is that firms decide how much to produce – each firm i decides what qi will be and then the market determines the price as being whatever will result in Q being purchased by buyers

-What firm i does is produce the level of output that maximizes its own profits, taking as given what its rivals are producing

-The ‘no regrets characterization’ of Nash Equilibrium occurs when the firms produce quantities that maximize profits

Cournot oligopoly model with heterogeneous firms

-The only costs that matter in determining the equilibrium quantities are marginal costs because only c’() functions appear in these equations.

-The Cournot model makes the prediction that the amount a firm produces

Collusion & Cartels

* Criminal offense to conspire to:

* Fix, maintain, or increase prices of product

* Fix, maintain, or decrease

* Divide up sales territories, customers, or markets.

* Overt act (one that can be clearly proved by evidence, and from which criminal intent can be inferred, as opposed to a mere intention in the mind to commit a crime) is a conspiracy, but also insists even if the existence of conspiracy can only be inferred from other observables, its criminal.

* Proving in court is not so easy!

* Criminal Case: “Beyond a reasonable doubt.”

* Civil Case: Preponderance of evidence (more likely than not).

Tacit Collusion: Occurs when cartels are illegal or overt collusion is absent. Put another way, two firms agree to play a certain strategy without explicitly saying so.

Criminal: ‘Tacit meeting of the minds to engage in bad conduct’

Not Criminal: Adopting a common course of conduct with awareness of likely responds by competitors.

Trade Associates:...