Temple University
Department of Economics
Economics 201
Microeconomics and Behavior
Imperfect Competition - Chapter 13
I. Overview
A. Oligopoly - few sellers interacting strategically
B. Monopolistic Competition
a. many firms
b. differentiated products
c. easy entry - easy exit
II. Oligopoly
A. Cournot duopoly
i. Firm 1 takes the other's output as
given
ii. Given Q2, work with 1's residual
demand curve
iii. Set MR = MC and solve for 1's
output in terms of Q2
iv. Repeat, but switch roles
v. Solve the two "reaction
curves"
vi. Each firm gets 1/3 of competitive
output
B. Bertrand duopoly
i. firm chooses price assuming
other's price is fixed
ii. consumers buy only from the low
price firm
iii. each firm cuts price to marginal
cost
iv. firms share the competitive
output equally
C. Stackelberg duopoly
i. one leader, one follower
ii. The leader believes the follower
behaves like a Cournot duopolist
iii. The outcome is that the leader
ignores its own Cournot reaction function, or risks spiraling to the Cournot
solution, which is worse
D. Comparison of outcomes
Comparison of Oligopoly Models | |||
Model | Industry Output | Market Price | Industry Profit |
Shared monopoly | Qm = a/(2b) | Pm = a/2 |
![]() |
^ | v | v | |
Cournot | (4/3)Qm | (2/3)Pm | (8/9) ![]() |
^ | v | v | |
Stackelberg | (3/2)Qm | Pm | (3/4)
![]() |
^ | v | v | |
Bertrand | 2Qm | 0 | 0 |
|| | || | || | |
Perfect Competition | 2Qm | 0 | 0 |
III. The Theory of Strategic Behavior
A. Player 1 chooses her best course of action given a
conjecture about the opponent's behavior.
B. Where there is a coincidence of conjectures we have an
equilibrium. This notion of equilibrium does not imply that the outcome is
best either individually or severally, only that the participants will not
change their strategy once the see the strategy chosen by the opponent.
C. Methods for solving games of strategic interaction
i. Dominant strategy
ii. Elimination of dominated
strategies
iii. Best response
D. Bertrand again - If they could collude to set price at Pm
then they each get half of .
But the dominant strategy is to defect and drive the price to P = MC. This
is also a Nash equilibrium.
E. Cournot again - Each firm's reaction function is a
dominant strategy. Where they intersect is a Nash equilibrium.
F. Stackelberg again - The solution to Stackelberg is a Nash
equilibrium, although Leader does not use a dominant strategy. Once he
sees Followers output, Leader would like to revise its output, but doesn't do so
since the result is to spiral on to the less desirable Cournot solution.