So far, we have only analyzed one type of oligopoly. However, even when there are a small number of firms in a market, they can behave in a variety of different ways. We can compare the outcomes from these different types of competition to the competitive market. In this lecture, we learn more about different models of oligopoly.
Bertrand price competition can be applied to pricing cereal. Image courtesy of ElCapitan on Flickr.
Keywords: Cournot competition; cooperative competition; cartels; mergers; Bertrand competition.
Read the recitation notes, which cover new content that adds to and supplements the material covered in lecture.
Before watching the lecture video, read the course textbook for an introduction to the material covered in this session:
- [R&T] Chapter 11, “The World of Imperfect Competition.”
- [Perloff] Chapter 12, “Pricing and Advertising.” (optional)
This concept quiz covers key vocabulary terms and also tests your intuitive understanding of the material covered in this session. Complete this quiz before moving on to the next session to make sure you understand the concepts required to solve the mathematical and graphical problems that are the basis of this course.
How does the non-cooperative Cournot equilibrium in an oligopoly compare to the equilibrium in a competitive market?
The correct answer is that the non-cooperative Cournot equilibrium results in less output and more profits compared to the competitive equilibrium. Each firm in Cournot equilibrium has some market power, which it exploits to raise profits by lowering the amount of production (and thus raising prices).
As the number of firms in a Cournot equilibrium increases, what happens to the mark-up charged by each firm?
The correct answer is that the mark-up charged by each firm in a Cournot equilibrium decreases as the number of firms becomes larger. However, the mark-up will only be equal to zero if the market is perfectly competitive.
In a perfectly competitive market, the price of a good is equal to the marginal cost of producing it. This is also true in another market structure; which one?
The correct answer is Bertrand competition in an oligopoly, or competition on price. Cournot competition is equivalent to competition on quantity, and it does not result in a price set equal to marginal cost. In a monopoly, marginal revenue is set equal to marginal cost.
What is a strategy firms can use to avoid Bertrand competition?
The correct answer is that firms can differentiate their product to avoid Bertrand competition, thus enabling them to set a price that is above marginal cost. Shifting the price does not alter the competitive structure: the firm will still ultimately be required to set the price at marginal cost to remain in the market. In Bertrand competition, it is assumed that firms produce whatever quantity of the good is demanded by consumers, so producing more of the product is not an available option.