13. Oligopoly

TL;DR

In an oligopoly market, firms compete with each other, and the most common market structure is oligopoly, where a few firms compete with barriers to entry. The Cournot model is used to determine the equilibrium quantity and price in such a market.

Transcript

[SQUEAKING] [RUSTLING] [CLICKING] JONATHAN GRUBER: All right, why don't we get started? Today we're going to move on to, finally, the most realistic market structure. We talked about perfectly competitive markets. Now, that was a very useful, extreme example to help us think about economic efficiency. We then flipped over to talk about the somewhat... Read More

Key Insights

• 👥 Oligopoly markets are characterized by a small group of firms competing with each other, with barriers to entry restricting competition.
• ❓ The Cournot model is used to determine the equilibrium quantity and price in an oligopoly market.
• ❓ The Cournot equilibrium occurs when both firms choose quantities that maximize profit, given the quantities chosen by the other firm.
• 👋 Best response curves represent the optimal quantity that a firm should choose, given the other firm's quantity.

Questions & Answers

Q: What is an oligopoly market?

An oligopoly market is a market structure characterized by a small group of firms competing with each other, where there are barriers to entry that restrict the number of competitors.

Q: How does the Cournot equilibrium differ from the monopoly equilibrium?

In a monopoly, there is only one firm controlling the market, while in the Cournot equilibrium, there are multiple firms competing with each other. The Cournot equilibrium occurs when the firms choose quantities that maximize profit, given the quantities chosen by the other firms.

Q: What is the significance of the best response curves in the Cournot model?

Best response curves represent the optimal quantity that a firm should choose, given the quantity chosen by the other firm. The best response curves intersect at the Cournot equilibrium, where both firms are maximally satisfied with their chosen quantities.

Q: Can the Cournot equilibrium exist in a market with multiple equilibria?

No, the Cournot equilibrium is the only equilibrium in the model. However, in reality, it is possible to have multiple equilibria if the best response curves do not intersect or if there are nonlinear best response functions.

Summary & Key Takeaways

• The Cournot equilibrium is the point at which firms choose a quantity that maximizes profit, given the quantity chosen by the other firm.

• The Cournot model involves developing residual demand functions, marginal revenue functions, and solving for the optimal quantity as a function of the other firm's quantity.

• The equilibrium occurs when both firms' quantities intersect, and neither firm wants to deviate from their chosen quantity.