BUSA 4800/4810 Feb 23, 2012

• Topics:

– Midterm Exam

– Non-cooperative Duopoly

– Best Response and Solver

– Airbus Project

Midterm, March 5 • Theory Section and Case Study

• Theory:

– Lecture Notes & associated chapters

– Porter Articles

– Game Theory (questions online)

• Case: Danmark Packaging

– Prep/stud Question posted

– 2 or 3 of posted questions on exam

– 1 question will be NEW

Cournot Duopoly Model

• Consider a market with two large firms who compete for market share

• Assume that they produce a homogeneous good

• Examples: – Concrete Industry

– Pulp and Paper Mills

– Steel Industry

– Industrial Chemicals

• These types of industries produce goods that are inputs into other product markets

• Therefore there will be a single price for output of both firms

• Market price is determined by total quantity available

• Quantity (or capacity) of each firm will be the strategic choice variable

Profit Maximization ( 1 firm)

• Demand function

– Q = 10 – P

• Total Revenue:

– TR = PxQ

• Costs:

– $4 per unit

– TC = 4Q

Price Quantity

Total

Rev

Total

Cost Profit

10 0 0 0 0

9 1 9 4 5

8 2 16 8 8

7 3 21 12 96 4 24 16 8

5 5 25 20 5

4 6 24 24 0

3 7 21 28 -7

2 8 16 32 -16

1 9 9 36 -27

0 10 0 40 -40

Profit Max Graphically

10

1053

7

4

6

MC = 4

MR D

Quantity

9 profit

PRICE

10

1053

21

12

6

TC = 4q

TR = pxq

= (10-q)q

quantity

9 profit

Cournot Best Response Functions

•Firm 1’s Response

•If firm 2 doesn’t produce, act like a monopoly

•Or if q2 = 0, q1 = 3

•If firm 2 “floods” the market, then don’t produce

•Or if q2 = 6, q1=0

•1’s response “Function”

•q1 = 3 – 0.5q2

•Firm 2’s Response

•q2=3 – ½q1

3

6

q2

63 q1

2

2

Cournot

Firm 1's Best Response

Firm 2's Best

Response

Airbus 2012 • Form Teams

• Read Airbus Case

• Complete the Excel Spreadsheet

– Fill in missing values

– Add additional sheets for each scenario

• Write a Formal Report with

– Overview of the situation

– Explanation of values used

– Results and recommendations (with defendable analysis)

– Sensitivity Analysis (What if’s)