Question

Explain each of the Oligopolies and provide a graph for each?

•Cournot Model

•Stackelberg Model

•Bertrand Model

•Sweezy (Kinked-Demand) Model

Answer 1

Solution:

a) Cournot model: This is the kind of market structure where a few firms compete by simultaneously deciding on the quantity of output to sell. The total output produced in the market then decides on the market price, which is faced by all firms.

b) Stackelberg model: Under this market structure, one firm can observe the other firms' action and the decision, either on quantity or on price, do not take place simultaneously. One firm move first, called the leader firm, and the other firm, called the follower, then choose its own optimal strategy. In case of quantity, then leader firm has first mover advantage, as it produces more quantity, capture higher market share and thus achieves a higher profit.

c) Bertrand model: This is similar to the Cournot competition, the only difference being that firms do not compete over quantity but compete over prices. So, all firms simultaneously choose the optimal price to charge for a product. Under certain assumptions, the optimal price chosen by firms is simply Marginal cost, because the competition is rigorous and in order to capture the entire market, a price cut competition result in marginal cost pricing. In this sense outcome is much similar to that of perfect competition.

d) Sweezy model: Under this market structure, the firms face a kinked demand curve and thus the marginal revenue function is a kinked one. Furthermore, the response of other firms is such that a price cut or price decrease is rigorously competed among firms as in, price cut by one firm is followed by a price cut by all other firms (in order to capture the market size), while a price increase is never competed or followed back by any other firm.

Following are the required graphs. Forming all graphs for 2 firms in the market; BR1 is best response function of firm 1 and BR2 is best response function of firm 2; Nash equilibrium occurs at intersection of the two best response curves.

For all graphs except sweezy model, it shows how the two firms compete. Under sweezy graph, the market graph carrying prices and quantity has been shown: