Microeconomics for Dummies by Lynne Pepall & Peter Antonioni & Manzur Rashid PhD

Author:Lynne Pepall & Peter Antonioni & Manzur Rashid PhD
Language: eng
Format: epub
ISBN: 9781119184409
Publisher: Wiley
Published: 2016-02-01T00:00:00+00:00

A helpful way to start understanding oligopoly is to consider the special case of a duopoly, where only two firms are operating in the market. After you get the hang of thinking about how two firms interact with each other, you can adapt your modeling to think about the harder cases involving three or more firms.

Investigating how firms interact in a duopoly

The first thing to consider is how firms interact in the market place to influence price. Some firms, such as those in service industries, produce to order and set their prices. For example, a restaurant sets a menu price, and customers decide how much to order at that price. In this case, we say that the restaurant produces to order. These kinds of firms are price setters. On the other hand, firms in manufacturing industries, such as those making automobiles, textiles, and leather goods, produce to stock or inventory and price adjusts to clear the market. These firms compete in quantities. The two different approaches to how firms influence price and are associated with the following models:

Cournot model: Where quantity is the strategic variable.

Bertrand model: Where price is the strategic variable or the thing that firms control.

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