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Lecture 11 Notes

This document provides lecture notes on oligopoly. It discusses key aspects of oligopolies including that they have few sellers and differentiated products. It introduces the Cournot and Stackleberg models of oligopoly. The Cournot model assumes firms compete on quantities and reach equilibrium where their reaction curves intersect. As the number of firms increases in the Cournot model, the equilibrium approaches perfect competition. The Stackleberg model assumes one firm is a leader that can move first to position itself on rivals' reaction curves to earn higher profits.

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27 views3 pages

Lecture 11 Notes

This document provides lecture notes on oligopoly. It discusses key aspects of oligopolies including that they have few sellers and differentiated products. It introduces the Cournot and Stackleberg models of oligopoly. The Cournot model assumes firms compete on quantities and reach equilibrium where their reaction curves intersect. As the number of firms increases in the Cournot model, the equilibrium approaches perfect competition. The Stackleberg model assumes one firm is a leader that can move first to position itself on rivals' reaction curves to earn higher profits.

Uploaded by

120219a
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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LECTURE 11 NOTES

OLIGOPOLY
-

Few sellers, many buyers


Few sellers so have large market shares
Usually supply differentiated products
2 firms in the market = duopoly
Some oligopolies have dominant players and a fringe
Some have strategic groups
Non-price competition
Large barriers to entry
Interdependence between the sellers is key
Firms have ability to raise and lower costs without a great impact on price
Possibility of collusion
E.g. Sugar, package holiday industry, accountancy

COURNOT OLIGOPOLY
-

Welfare and tight oligopoly


Welfare depends upon the number of firms in the industry and the
conduct they adopt
Models involve competition in quantities and price is less explicit
NON PRICE COMPETITION

If firm 1 believes firm 2 will supply the entire industry output, it will supply zero
Market Demand
A = residual demand for firm 1
A

MC=AC

Q1

Q2

If firm 1 believes firm 2 will supply zero output, itll become the monopoly
supplier

Q2

MR

REACTION CURVE

Q1

Firms reaction curve Q1= f(Q2)

d
1s output

If firm 1 believes firm 2 is producing at c firm


will be at d.
A = monopoly P>MC

B = perfect competition P = MC

A = firm 1s reaction curve

B = firm 2s reaction curve


Cournot Equilibrium at cross= maximising the
belief where the other firm is producing.

A NUMERICAL EXAMPLE
Market Demand = P = 30-Q

where Q = Q1 +Q2

Assume Q1 = Q2 and AC = MC
See pp

FIRM NUMBERS
-

If the number of firms increases then the Cournot equilibrium approaches


the competitive equilibrium

STACKLEBURG
-

Assumed 1 firm was a leader and they could move first because they have
info about industry demand and costs. They thus position themselves on
their rivals reaction curve and earn more profit than under cournot .

Q1

A = stackleburg equilibrium

Bertrand argued a major problem with the cournot model is

Q1

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