Microeconomics
Oligopoly and monopolistic competition
—> What is an oligopoly?
—> What Does Equilibrium Mean in an Oligopoly?
—> Oligopoly with identical goods: Cartels and Collusion
—> Oligopoly with identical goods: Bertrand Model
—> Oligopoly with identical goods: Cournot Model
, • Imperfect competition: The industry structure between perfect competition and
monopoly
• Oligopoly: market structure characterized by competition among a small
number of rms
◦ They have some market power and there is some competition
◦ Factors a ecting P and Q :
• whether the companies make identical products (as in an oil
oligopoly) or products that are slightly di erent from one another
(like Coke and Pepsi)
• how intensely the companies compete
• whether they compete with one another by choosing the prices
they charge or the quantities they produce
• Monopolistic competition: a type of imperfect competition where a large
number of rms have some market power, but each makes zero economic
pro t in the long run
• What Does Equilibrium Mean in an Oligopoly?
◦ Perfect competition & monopoly
• Qs = Qd --> market stable with no excess supply or demand = the
market clears
▪ consumers and producers do not want to change their
decisions
◦ The problem in Oligopoly: each company’s action in uences what the
other companies want to do
• To achieve an outcome in which no rm wants to change its
decision means determining more than just a price and quantity for
the industry as a whole --> it has to apply to each rm
individually
◦ Oligopoly: starts with market clears but adds a requirement
• no company wants to change its behavior (its price or quantity)
once it knows what other companies are doing
• MUST be stable among the individual producers in the market
◦ Nash Equilibrium --> equilibrium in which each rm is doing its best
conditional on the actions taken by other rms
• Oligopoly with Identical Goods:
◦ Model --> Collusion and Cartels: all the rms in an oligopoly coordinate
their production and pricing decisions to collectively act as a monopoly to
gain monopoly pro ts to be split among themselves
• Assumptions
▪ Firms make identical products
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Oligopoly and monopolistic competition
—> What is an oligopoly?
—> What Does Equilibrium Mean in an Oligopoly?
—> Oligopoly with identical goods: Cartels and Collusion
—> Oligopoly with identical goods: Bertrand Model
—> Oligopoly with identical goods: Cournot Model
, • Imperfect competition: The industry structure between perfect competition and
monopoly
• Oligopoly: market structure characterized by competition among a small
number of rms
◦ They have some market power and there is some competition
◦ Factors a ecting P and Q :
• whether the companies make identical products (as in an oil
oligopoly) or products that are slightly di erent from one another
(like Coke and Pepsi)
• how intensely the companies compete
• whether they compete with one another by choosing the prices
they charge or the quantities they produce
• Monopolistic competition: a type of imperfect competition where a large
number of rms have some market power, but each makes zero economic
pro t in the long run
• What Does Equilibrium Mean in an Oligopoly?
◦ Perfect competition & monopoly
• Qs = Qd --> market stable with no excess supply or demand = the
market clears
▪ consumers and producers do not want to change their
decisions
◦ The problem in Oligopoly: each company’s action in uences what the
other companies want to do
• To achieve an outcome in which no rm wants to change its
decision means determining more than just a price and quantity for
the industry as a whole --> it has to apply to each rm
individually
◦ Oligopoly: starts with market clears but adds a requirement
• no company wants to change its behavior (its price or quantity)
once it knows what other companies are doing
• MUST be stable among the individual producers in the market
◦ Nash Equilibrium --> equilibrium in which each rm is doing its best
conditional on the actions taken by other rms
• Oligopoly with Identical Goods:
◦ Model --> Collusion and Cartels: all the rms in an oligopoly coordinate
their production and pricing decisions to collectively act as a monopoly to
gain monopoly pro ts to be split among themselves
• Assumptions
▪ Firms make identical products
fi ff fifi fi fi fffi fi fi fl
