OLIGOPOLY 1

Oligopoly

Simeon Chester (1022823)

Faculty of Social Science
Department of Economics
University of Guyana
ECN 3103: Industrial Organisation
Mr. Elton Bollers
October 26, 2023
OLIGOPOLY 2

Oligopoly

Problem

Q = 1000 − 1000P

M C = AC = 28 cents
Assuming a duopoly
Finding P (Inverse Demand Function)

Q = 1000 − 1000P

−1000P = Q − 1000
Q − 1000
P =
−1000
Q
=− +1
1000
Q
=1−
1000
OLIGOPOLY 3

Cournot
Q
Given P = 1 − 1000
and Q = q1 + q2 ,

q1 + q 2
P =1−
1000
Firm 1

T R = P q1
q 1 + q2
 
= 1− · q1
1000
q1 2 + q1 q2
= q1 −
1000

M R = T R′
!
δR q 1 2 + q 1 q2
= q1 −
δq1 1000
δ δ q1 2 + q1 q2
= q1 −
δq1 δq1 1000
!
[1000 · 2q1 + q2 ] − [(q1 2 + q1 q2 ) · 0]
=1−
10002
2000q1 + 1000q2 − 0
=1−
1000000
2000q1 + 1000q2
=1−
1000000
OLIGOPOLY 4

MR = MC
2000q1 + 1000q2
1− = 0.28
1000000
2000q1 + 1000q2
− = 0.28 − 1
1000000
2000q1 + 1000q2
− = −0.72
1000000
−2000q1 − 1000q2 = −0.72 · 1000000

−2000q1 − 1000q2 = −720000

−2000q1 = −720000 + 1000q2

−720000 + 1000q2
q1 =
−2000
= 360 − 0.5q2
Therefore, Firm 1’s reaction function is q1 = 360 − 0.5q2 .
Firm 2
T R = P q2
q 1 + q2
 
= 1− · q2
1000
q1 q2 + q 2 2
= q2 −
1000

M R = T R′
!
δR q 1 q2 + q 2 2
= q2 −
δq2 1000
δ δ q1 q2 + q 2 2
= q2 −
δq2 δq2 1000
!
[1000 · q1 + 2q2 ] − [q1 q2 + q22 · 0
=1− ]
10002
1000q1 + 2000q2 − 0
 
=1−
1000000
1000q1 + 2000q2
 
=1−
1000000
OLIGOPOLY 5

MR = MC
1000q1 + 2000q2
 
1− = 0.28
1000000
−1000q1 − 2000q2
= 0.28 − 1
1000000
−1000q1 − 2000q2
= −0.72
1000000
−1000q1 − 2000q2 = −0.72 · 1000000

−1000q1 − 2000q2 = −720000

−2000q 2 = −720000 + 1000q1

−720000 + 1000q1
q2 =
−2000
= 360 − 0.5q1
Therefore, Firm 2’s reaction function is q2 = 360 − 0.5q1 .
Reaction Functions
Firm 1’s reaction function is q1 = 360 − 0.5q2 .
Firm 2’s reaction function is q2 = 360 − 0.5q1 .
Firm 1’s quantity

q1 = 360 − 0.5q2

q1 = 360 − 0.5(360 − 0.5q1 )

q1 = 360 − 180 + 0.25q1

q1 = 180 + 0.25q1

q1 − 0.25q1 = 180

0.75q1 = 180
180
q1 =
0.75
= 240
OLIGOPOLY 6

Firm 2’s quantity

q2 = 360 − 0.5q1

q2 = 360 − 0.5(360 − 0.5q2 )

q2 = 360 − 180 + 0.25q2

q2 = 180 + 0.25q2

q2 − 0.25q2 = 180

0.75q2 = 180
180
q2 =
0.75
= 240

Total quantity is

Q = q1 + q 2

= 240 + 240

= 480
Price is

Q
P =1−
1000
480
=1−
1000
= 1 − 0.48

= 0.52
OLIGOPOLY 7

Stackelberg

Assuming a duopoly where Firm 1 is the leader and Firm 2 is the follower
Firm 2’s reaction function

q2 = 360 − 0.5q1

Firm 1

Q
P =1−
1000
q1 + q2
=1−
1000
q1 + (360 − 0.5q1 )
=1−
1000
q1 + 360 − 0.5q1
=1−
1000
0.5q1 + 360
=1−
1000
= 1 − 0.0005q1 − 0.36

= 0.64 − 0.0005q1

T R = P q1

= (0.64 − 0.0005q1 ) · q1

= 0.64q1 − 0.0005q1 2

dR
MR = TR
dq1
δR  
= 0.64q1 − 0.0005q1 2
δq1
= 0.64 − 0.001q1
OLIGOPOLY 8

MR = MC

0.64 − 0.001q1 = 0.28

−0.001q1 = 0.28 − 0.64

−0.001q1 = −0.36
−0.36
q1 =
−0.001
= 360 units
The optimum for firm two (follower)

q2 = 360 − 0.5q1

= 360 − 0.5(360)

= 360 − 180

= 180 units
Industry quantity

Q = q1 + q 2

= 360 + 180

= 540 units
Industry price
Q
P =1−
1000
540
=1−
1000
= 1 − 0.54

= 0.46
OLIGOPOLY 9

Bertrand

With the Bertrand Model of Oligopoly there is a competitive outcome where P

eventually becomes MC i.e. P = M C.
Therefore,

P = 0.28

To get Q,
Q
P =1−
1000
Q
0.28 = 1 −
1000
Q
− = 0.28 − 1
1000
Q
− = −0.72
1000
−Q = −0.72 · 1000

−Q = −720

Q = 720 units
720
Given a duopoly, each firm produces 2
= 360 units
OLIGOPOLY 10

Cartel

TR = PQ
Q
= (1 − )·Q
1000
Q2
=Q−
1000

M R = T R′
δR Q2
= (Q − )
δQ 1000
1000 · 2Q − Q2 · 0
=1−( )
10002
2000Q − 0
=1−( )
10002
2000Q
=1−( )
10002
2000Q
=1−( )
1000000
2Q
=1−( )
1000
Q
=1−( )
500

MR = MC
Q
1− = 0.28
500
Q
− = 0.28 − 1
500
Q
− = −0.72
500
−Q = −0.72 · 500

−Q = −360

Q = 360 units
OLIGOPOLY 11

360
Each firm would be producing a quantity of 2
= 180 units.
Q
P =1−
1000
360
=1−
1000
= 1 − 0.36

= 0.64

Problem 2

1. How does the Cournot equilibrium change if each firm faces a fixed cost of F as well
as a constant marginal cost per unit?

2. What happens to price and output in the Cournot, Bertrand, and Stackelberg models
if marginal costs increase by 10 percent?