-Few firms, products may or may not be differentiated. Substantial barriers to entry (natural or
-Pricing is based off of decisions, must think how changing your price will influence other firms
to change their prices
Nash equilibrium: each firm wants to do the best it can given what it’s competitors are doing
We focus on duopolies, but everything can be applied to oligopolies
Cournot Model: Two firms, market price depends on output of both firms. Each firm must
decide how much to produce and make their decision at the same time. Each firm treat’s the
output level of his competitor as fixed. (example of Nash equilibrium) Useless for dynamic
adjustment, because it assumes prices are fixed. Firms have no opportunity to react.
If only one price is given (Conference 4, Problem 1), find the price that the firm will use, and if a
firm is added subtract the price from the constant in the price equation, and then calc the
equilibrium quantities of the new equation (But first convert to marginal eq)
Reaction curves: How much firm X will produce vs how much firm y will produce. Where they
intersect is Cournot equilibrium!
How to find reaction curves for firm 1. Find total revenue (In price fn use Qtotal, multiply by Q1).
Find marginal revenue wrt Q1. Set Mr=MC, solve for Q1
Collusion curve: when the companies work together. Follow above steps but multiply price by
Qtotal.. Firms split profit evenly. Firms should produce less but earn higher profit
Perfect competition < Cournot Equilibrium < Collusion
Stackelberg Model – One firm can set price first. If firm 1 decides on an output, firm 2’s profit-
maximizing output is determined using the Cournot reaction curve because firm 1’s output is
fixed. Firm 1 chooses Q1 so that MR=MC. But R1 depends on Q2, so firm 1 must anticipate
Q2. Sub firm 2 reaction curve into MR1 and solve.
-It is advantageous to set price and quantity first because if firm 2 produces a great quantity it
will drive prices down and benefit no firm.
12.3 Price Competition
In 12.2 we looked at quantities, now we look at prices
Bertrand Model: Firms produce homogeneous good and make de