CAS EC 101 Lecture Notes - Lecture 22: Monopolistic Competition, Lead, Substitute Good
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An oligopoly is a market with a small number of firms linked by strategic interaction. Here we use game theory to model duopoly a market with only two firms. First we describe bertrand duopoly in which the firms compete by setting prices. Then we model cournot duopoly in which the firms compete by setting output quantities. Two firms aux (a) and beaux (b) each produce french white wine. The two brands are perfect substitutes -- no one can tell the difference. In a bertrand duopoly, market demand is assumed to be perfectly inelastic. Total quantity demanded is constant and independent of price. Consumers buy everything from the low-price firm. If the firms prices are the same, consumers buy half their wine from each firm. Each firm has a constant marginal cost and no fixed cost, and ac = mc = 10. They each set a price pa and pb (their strategies)
