Question

Q12: Assume a duopoly industry. The equal-sized firms in the industry produce homogenous goods and play a game about setting their outputs in every month but only for the year 2013. What is the expected outcome of this game?

a. Same as a Cournot type of competition

b. Same as the Bertrand model of competition

c. Same as a Stackelberg type of competition

d. Same as a tit-for-tat strategy

Answer 1

Ans.

Expected outcome of this game is same as a Cournot type of competition.
In the Cournot assumption, each firm determines its profit- maximizing production level by assuming that the other firms’ output will not change.
This assumption simplifies pricing strategy because there is no need to guess what the other firm will do to retaliate. It also provides a useful approach to analyzing real- world behavior in oligopoly markets. Take the most basic oligopoly market situation, a two- firm duopoly market.
In equilibrium, neither firm has an incentive to change output, given the other firm’s production level. Each firm attempts to maximize its own profits under the assumption that the other firm will continue producing the same level of output in the future.
The Cournot strategy assumes that this pattern continues until each firm reaches its long- run equilibrium position. In long- run equilibrium, output and price are stable: There is no change in price or output that will increase profits for either firm.