MARKET STRUCTURES III: PRICE LEADERSHIP. (MICRO-ECONOMICS THEORY III)

An oligopoly is characterized by a market with a few firms that recognize the strategic interdependence. There are several possible ways for oligopolies to behave depending on the exact nature of their interaction. In a price leader model, one firm sets its price and the other chooses how much it wants to supply at that price. The leader has to take into account the reaction of the follower. COMPARING PRICE LEADERSHIP AND QUANTITY LEADERSHIP. We have seen how to calculate the equilibrium price and output in the case of quantity leadership. Each model determines a different equilibrium price and output combination; each model is appropriate in different circumstances. One way to think about quantity setting is to think the firm as making capacity choice. When a firm sets a quantity, it is in effect determining how much it is able to supply to the market. If one firm is able to make an investment in capacity first, then it is naturally modeled as a quantity leader.