Firm Behavior in Oligopolistic Markets

Martin Kolmar and Magnus Hoffmann
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Martin Kolmar: University of St. Gallen

Chapter 12 in Workbook for Principles of Microeconomics, 2018, pp 197-219 from Springer

Abstract: Abstract 1. In a Cournot oligopoly, the firms disregard the influence of their behavior on the price. 2. In a duopoly, collusive behavior can raise overall profits. 3. In a duopoly, collusive behavior is the equilibrium strategy. 4. In a Bertrand oligopoly with symmetric firms and constant marginal costs, the equilibrium price is equal to marginal costs. In an oligopolistic market, all firms have identical cost functions $$C(y)=c\cdot y$$ C ( y ) = c ⋅ y , with c ≥ 0. 1. If the firms are in Bertrand price competition, there is no deadweight loss. 2. Collusive behavior cannot occur, because the firms have constant marginal costs. 3. In both Bertrand price competition and in Cournot quantity competition, the equilibrium market price is larger than marginal costs. 4. If the demand curve is linear and falling, the total quantity of the good supplied in Cournot competition will be lower than in Bertrand competition. Consider a duopoly market in which two firms produce a good with identical constant marginal costs of MC = 0. The demand for the total quantity y in the market is $$P(y)=300-y$$ P ( y ) = 300 - y . 1. In the equilibrium with Bertrand price competition, 300 units of the good are traded. 2. In the equilibrium with Cournot quantity competition, 200 units of the good are traded. 3. In equilibrium, the consumer surplus in Bertrand price competition is larger than in Cournot quantity competition. 4. The marginal costs have to be smaller than 300, in order for a positive quantity to be traded in a Cournot competition.

Keywords: Bertrand Price Competition; Cournot Quantity Competition; Identical Constant Marginal Cost; Bertrand Oligopoly; Deadweight Loss (DWL) (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1007/978-3-319-62662-8_12

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