Question

You are analyzing a certain oligopolist industry with of only two companies, Firm A and Firm B. Both companies have a production process with constant marginal costs of $2000. Assume there are no fixed costs. As a consequence of a change in the operating structure of firm B, their marginal cost increased to a constant amount of $2100. Firm A still produces at the same marginal cost as before. What happens to each firm's profits and output in the new equilibrium in each of the following oligopoly markets: a. Cournot oligopoly. b. Sweezy oligopoly. c. Bertrand oligopoly.

Answer 1

a)

Cournot Oligopoly:

In case of cournot equilibrium, rise in cost of production would cause fall in output level of firm B. Overall output level will fall. Fall in output will cause rise in price. Thus, firm B is likely to suffer the loss. While the firm A cost is same but its price has increased, so its profit is likely to rise.

b)

Sweezy Oligopoly:

There is kink in demand curve in sweezy oligopoly model, hence certain rise in level of cost would not lead to change in equilibrium output and price. There is discontinuity in Marginal revenue function.

Price will remain same , but profit of firm B will invariably fall. There will not be change in output and profits of firm A.

c)

In case of Bertrand model, firms compete on price. They tend to undercut price until it becomes to equal to MC.Differential in MC of both firm will cause exit of less efficient firm from market.

Firm B will be out of market.