Question

Two firms, Firm A and Firm B, operate in a duopoly market. Firm A has been a leader in the industry for years and has observed how firm B reacts to its output decisions. If one of the firms were to produce as a perfectly competitive firm, they would produce 6,000 units. Marginal costs are assumed to be constant and equivalent between the two firms. Use this information to answer the following questions

What oligopoly model is most appropriate to analyze the question? Why?

Assuming the Cournot model is appropriate and that Firm A expects Firm B to produce 1,000 units, show using both the market demand diagram (MR, D, and MC) and reaction curves. Label the price charged in the market as Pc.

Is the equilibrium from question 2 a Cournot-Nash equilibrium? If not, determine the correct equilibrium and illustrate on your reaction curves how it would be reached.

Assuming the Stackelberg model is appropriate, illustrate Firm A's residual demand curve and determine how much Firm A and B will produce. Label the equilibrium price charged in the market as Ps.

Suppose the firms successfully form a cartel and collude, what combined output level will they produce at? How would profits compare to the other oligopoly models?

Compare the price, quantity, profit and DWL among monopoly, Cournot, Stackelberg and perfect competition. (you can keep this as simple as Pm>Pc>... but just make sure your labels are clear)

Answer 1

Gigantic number of buyers and few agents: this is a exact feature of oligopoly market. Massive numbers of purchasers however best small numbers of retailers exist in the market. Not like best competition and monopolistic competition simplest a small number of organizations dominate in the market below oligopoly.

2. Differentiated and multiple merchandise: In an oligopoly market, firms produce differentiated products. Product of 1 organization is different from the made of others. Each and every company claims that its product is superior from competing products available in the market. Businesses produce a couple of merchandise additionally. For illustration, Maruti-Suzuki manufactures a couple of units of household automobiles i.E. Maruti 800, Zen, Swift, Esteem etc. In a similar way different manufacturers additionally produce a couple of merchandise below the equal manufacturer.

Three. Interactivity: oligopoly markets are characterized by using interactivity. The choices of 1 company have an effect on, and are influenced with the aid of, the decisions of the opposite companies. Companies at all times notice the moves of others before finding out their costs and output.

Four. Absence of Uniformity: all of the companies in an oligopoly market might not be of the same dimension. Some companies are colossal in dimension than others. Some companies may produce extra quantity of products than others. With the aid of producing few merchandise a organization can be enormous than others. Massive firms dominate available in the market. They produce majority production and at all times lead available in the market.

5. Commercial and promoting rate: Oligopolistic firms spend a massive amount on advertisement and advertising. In a reduce-throat competition each firm wants to shift the demand in their favour by way of showing their products unique and advanced to other merchandise by way of advertisement and advertising strategies.

6. Market power: The colossal firms in an oligopoly market experience market power. Via differentiated merchandise and progressive advertisements few corporations capture the most important share in the market. Corporations perpetually compete with each and every different to grow to be number one. For illustration, newspaper market. Instances of India and Hindustan occasions both declare to be quantity one in Delhi. They regularly supply distinct reductions to expand their sale. These two only seize important share in the market.

7. Conditional fee tension: cost rigidity prevails in an oligopoly market. Except rival firm trade its price, corporations do not exchange costs. A firm will change its cost when its opponents change price, A firm will comply with its rival most effective when rival reduces its price. Price upward thrust is almost always not adopted by way of rivals. Considering the fact that of cost rigidity organizations below oligopoly face a kinked demand curve.

Eight. Shut competition: a detailed competitors exist in an oligopoly market due to the fact of less number of dealers. Every organization reacts to its rivals. Each firm attempt to be aware of about the upcoming merchandise of its competitors. Each and every firm tries to show that its merchandise are exclusive and sophisticated to the merchandise of others. Every firm is aware of that any change in price and pleasant of products might be adopted via the rivals.

9. Boundaries to Entry: Oligopoly markets are characterized by some limitations to entry. It turns into complicated for a new firm to enter into the market in view that of typical obstacles like, economies of scale and scope, fee expertise of historical corporations, patent rights, and many others. In addition to these, corporation created barriers may also avoid the new organizations from entering into the market. Predatory pricing and extra capacity are one of the crucial common methods that the existing companies apply to position limitations for the new corporations who want to enter the market.
Ordinary factors of oligopoly

(a) Economies of Scale: the present large firms in an oligopoly market enjoy the improvement of division of labour as a result of their big share out there. When businesses produce in gigantic scale, creation method can also be divided in lots of levels. Specialization plays an primary position in this kind of challenge. Division of labour has contributed drastically in present day monetary growth. As Adam Smith discovered very long time again that it is dependent upon the scale of the market. The huge corporations have fee advantage over the small companies when they produce in colossal scale via division of labour. The average variable rate declines when a organization produces in tremendous scale.

(b) constant price: The constant fees are very excessive to set up a new corporation in an oligopoly market. For a new organization, to design, improve and marketing entails a massive sunk cost (expenses which are not ever recovered). High constant bills push the total natural fee upward if a firm produces in small numbers. The existing corporations, these produce in large numbers, have a special pricing potential over a brand new corporation that have an extraordinarily small share available in the market. Giant fixed expenses avoid the new organizations from getting into the market.

(c) Economies of Scope: businesses which produce various merchandise in tremendous scale enjoy economies of scope. A single company produces a couple of merchandise under a single company. For example, Hindustan degree Ltd. Produces a couple of tub soaps and beauty products in special names. In a similar fashion Johnson and Johnson produces nearly all objects required for the small children. It's the dimension of the organization, not the size of the plant or quantity of a single product which help them to diminish or distribute the non-production price among quite a lot of merchandise they produce. Finance and advertising and marketing charges are too excessive for a brand new company in the sort of market the place the existing businesses have a price potential (via economies of scope).

Organization-created factors of Oligopoly

Strategic behaviour is fundamental for an oligopolitic corporation to stay a profit making organization and to hinder others to enter into the market. Common dimension of the survivors rises when the quantity of organization decreases. Dominating businesses in an oligopoly market could buy the small oneâs (acquisition) or can merge with them (mergers) to broaden their market energy and earn supernormal revenue. These supernormal earnings entice new entrants in the market unless the present firms can create and maintain barriers entry. Aside from the ordinary motives, companies can prevent others via convincing the aspirants. Essentially the most normal varieties of entry deterring practices are predatory pricing and excess potential.