Scribd
Upload
147 views5 pages

9 - Basic Oligopoly Models

This document discusses different models of oligopoly market structures: 1) Sweezy oligopoly assumes firms will match price decreases but not increases, leading to stable prices. 2) Cournot oligopoly assumes firms set output simultaneously without responding to competitors' outputs, resulting in economic profits. 3) Stackelberg oligopoly has a leader and follower, where the leader considers the follower's response, earning higher profits than the follower. 4) Bertrand oligopoly assumes firms engage in price competition, charging marginal cost and earning zero economic profits.

Uploaded by

Mikko
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
147 views5 pages

9 - Basic Oligopoly Models

This document discusses different models of oligopoly market structures: 1) Sweezy oligopoly assumes firms will match price decreases but not increases, leading to stable prices. 2) Cournot oligopoly assumes firms set output simultaneously without responding to competitors' outputs, resulting in economic profits. 3) Stackelberg oligopoly has a leader and follower, where the leader considers the follower's response, earning higher profits than the follower. 4) Bertrand oligopoly assumes firms engage in price competition, charging marginal cost and earning zero economic profits.

Uploaded by

Mikko
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 5

9 – Basic Oligopoly Models

INTRODUCTION
This chapter is the first of two chapters in which we examine managerial decisions in oligopoly
markets. Here we focus on basic output and pricing decisions in four specific types of
oligopolies: Sweezy, Cournot, Stackelberg, and Bertrand.

CONDITIONS FOR OLIGOPOLY


Oligopoly refers to A market structure in which there are only a few firms, each of which is large
relative to the total industry.
THE ROLE OF BELIEFS AND STRATEGIC INTERACTION
To gain an understanding of oligopoly interdependence, consider a situation where several
firms selling differentiated products compete in an oligopoly. In determining what price to
charge, the manager must consider the impact of his or her decisions on other firms in the
industry.

PROFIT MAXIMIZATION IN FOUR OLIGOPOLY SETTINGS


Each of the four models has different implications for the manager’s optimal decisions, and
these differences arise because of differences in the ways rivals respond to the firm’s actions.
Sweezy Oligopoly
An industry is characterized as a Sweezy oligopoly if :
1. There are few firms in the market serving many consumers.
2. The firms produce differentiated products.
3. Each firm believes rivals will cut their prices in response to a price reduction but will not raise
their prices in response to a price increase.
4. Barriers to entry exist.

Cournot Oligopoly
If each firm must determine its output level at the same time other firms determine their
output levels, or, more generally, if each firm expects its own output decision to have no impact
on rivals’ output decisions, then this scenario describes a Cournot oligopoly. More formally, an
industry is a Cournot oligopoly if :
1. There are few firms in the market serving many consumers.
2. The firms produce either differentiated or homogeneous products.
3. Each firm believes rivals will hold their output constant if it changes its output.
4. Barriers to entry exist.
best-response (or reaction) function : A function that defines the profit-maximizing level of
output for a firm for given output levels of another firm.
Cournot equilibrium : A situation in which neither firm has an incentive to change its output
given the other firm’s output.
Changes in Marginal Costs
In a Cournot oligopoly, the effect of a change in marginal cost is very different than in a Sweezy
oligopoly.

Collusion
Whenever a market is dominated by only a few firms, firms can benefit at the expense of
consumers by “agreeing” to restrict output or, equivalently, to charge higher prices. Such an act
by firms is known as collusion.
Stackelberg Oligopoly
An industry in which (1) there are few firms serving many consumers; (2) firms produce either
differentiated or homogeneous products; (3) a single firm (the leader) chooses an output
before rivals select their outputs; (4) all other firms (the followers) take the leader’s output as
given and select outputs that maximize profits given the leader’s output; and (5) barriers to
entry exist.
Bertrand Oligopoly
An industry is characterized as a Bertrand oligopoly if :
1. There are few firms in the market serving many consumers.
2. The firms produce identical products at a constant marginal cost.
3. Firms engage in price competition and react optimally to prices charged by competitors.
4. Consumers have perfect information and there are no transaction costs.
5. Barriers to entry exist.

COMPARING OLIGOPOLY MODELS


To see further how each form of oligopoly affects firms, it is useful to compare the models
covered in this chapter in terms of individual firm outputs, prices in the market, and profits per
firm. To accomplish this, we will use the same market demand and cost conditions for each firm
when examining results for each model. The inverse market demand function we will use is
P = 1,000 − (Q1 + Q2)
The cost function of each firm is identical and given by
Ci(Qi) = 4Qi
so the marginal cost of each firm is 4. We will now see how outputs, prices, and profits vary
according to the type of oligopolistic interdependence that exists in the market.

CONTESTABLE MARKETS
What we have in mind here is what economists refer to as a contestable market. A market is
contestable if :
1. All producers have access to the same technology.
2. Consumers respond quickly to price changes.
3. Existing firms cannot respond quickly to entry by lowering price.
4. There are no sunk costs (A cost that is forever lost after it has been paid).

In the Cournot model, a firm chooses quantity based on its competitors’ given levels of output.
Each firm earns some economic profits. Bertrand competitors, on the other hand, set prices
given their rivals’ prices. They end up charging a price equal to their marginal cost and earn zero
economic profits. Sweezy oligopolists believe their competitors will follow price decreases but
will ignore price increases, leading to extremely stable prices even when costs change in the
industry.
Finally, Stackelberg oligopolies have a follower and a leader. The leader knows how the follower
will behave, and the follower simply maximizes profits given what the leader has chosen. This
leads to profits for each firm but much higher profits for the leader than for the follower.

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy