Escolar Documentos
Profissional Documentos
Cultura Documentos
SESSION 5: Oligopoly
5. Cournot vs. Monopoly.
(a) Solve MWG 12.C.9.
b) Consider Cournot competition between two firms with different cost functions. Firm 1
has cost function c1(q1) = q12 / 2, while firm 2 has cost function c2(q2) = c q2, where
and c are known constants. Market demand remains p(Q) = A - BQ, where Q is total
quantity, q1 + q2. What are the first-order conditions for the optimal quantities chosen by
firms 1 and 2 in this case?
(c) Suppose that firm 1 would produce a larger quantity as a monopolist than firm 2
would produce as a monopolist. Is it possible that the total quantity produced by the two
firms in Cournot competition would be greater than firm 2's monopoly quantity, but less
than firm 1's monopoly quantity? Use the first-order conditions from part (b) and for
firm 1 as a monopolist to explain your answer.
p2 = 1 q2 + z q1
For simplicity, assume that each firm has zero marginal cost and no fixed costs.
In this question, you are asked to apply the logic of the Cournot duopoly model to
analyze the competition between these two firms.
a) Under what circumstances are goods 1 & 2 substitutes? Under what circumstances are
they complements?
b) Suppose that each firm takes the quantity produced by the other firm as given and
chooses its own quantity in order to maximize its profit. Derive each firms best response
function. What are the equilibrium quantities and prices in this model?
c) Solve the two inverse demand curves above for q1(p1, p2) and q2(p1, p2). Your answer
should look like q1(p1, p2) = a b p1 + c p2 and q2(p1, p2) = d f p2 + g p1, where you
supply the values of a, b, c, d, f, and g.
d) Now, suppose that each firm takes the price set by the other firm as given and chooses
its own price in order to maximize its profit. Derive each firms best response function
(which gives the price it charges as a function of the other firms price). What are the
equilibrium prices and quantities in this model?
e) Compare the equilibrium prices and quantities under quantity competition (part b) and
price competition (part d). Which type of competition results in higher prices? Which
results in higher quantities?
f) Relate your answer in part e to the difference between Cournot and Bertrand
competition when products are homogeneous.