Oligopoly Market

Quantity Setting
Presented by Group 5
Two main models
No single ideal model of competition within
oligopoly due to the different numbers of competitors
(from two upward) and dimensions of competition
(price, product attributes, capacity, technological
innovation, marketing, and advertising).

Stackelberg – A dominant firm

Cournot – Equally Position

Stackelberg Model
In many oligopolistic industries, one firm possesses
a dominant market share and acts as a leader by
setting price for the industry. 
 DEFINITION
The dominant firm establishes the
price for the industry and the
remaining small suppliers sell all
they want at this price. Each
produces a quantity at which its
marginal cost equals the market
price.

The more price elastic is the supply

response of rivals, the more elastic is
the dominant firm’s net demand.
→ The dominant firm does best to
refrain from raising the market
price.
 EXAMPLE
 B coffee shop is the dominant.
Market demand: Qd = 248 – 2P

The total supply of the 3 remaining shops: Qs = 48 +3P

 B cost
Marginal identifies
of B its net demand:
shop: Q = Qd – Qs = 200 – 5P
MC = 0.1Q
=> P = 40 – 0.2Q
=> MR = 40 - 0.4Q
 Setting MR = MC => 40 – 0.4Q = 0.1Q => Q = 80 units
(dominants output)
And P = 40 – 0.2*80 = 24
 Therefore Qs = 48 +3*24 = 120
=> Q of each small firm = 120/3 = 40 units
Cournot Model
It is named after its founder, French mathematician
Augustin Cournot.
DEFINITION
 Consists of a small number of equally positioned
competitors. A small number of firms produce
standardized, undifferentiated products and it is
assumed they cannot form a cartel.
=> The total quantity of output supplied by the firms
determines the market price according to an industry
demand curve.
 Advantage : The model produces logical results, with
prices and quantities that are between monopolistic
and competitive levels.
Limitations of Cournot
Competition
• The Cournot classic model assumes that the players set
their quantity strategy independently of each other. In
reality, they are likely to be highly responsive to each other’s
strategies.
• The suitability of price is the main variable in oligopoly
models , rather than quantity. 
• The differentiating factors: 2 products by different
suppliers can not be totally similar. 
 EXAMPLE
Supposed:
Market demand: P= 30 - Q =30 – (Q1 + Q2 + … + Qn)
Each firm’s average cost is constant at $6 per unit: MC = 6
Firm 1 faces the demand curve: P= 30 – (Q2 + … + Qn) – Q1

R = P . Q1 = [ 30 – (Q2 + … + Qn )] Q1 – Q12
To maximize profit : MR = MC

 [ 30 – (Q + … + Q )] – 2 Q = 6
Because all firms have identical costs and face the same demand, all will
2 n 1

produce the same output.

Q1 = 12 - .5 (Q2 + … + Qn) Denoting each firm’s output by Q*, we can
rewrite Equation:
Q* = 12 - 0.5( n – 1)Q*
 Q* = 24/ ( n + 1)
EXAMPLE
 Total output of the whole market:
Q = Q*. n = 24n/(n+1)
The price of a product: P = 30 - Q
 In short, quantity equilibrium has the attractive feature of being able to
account for prices ranging from a pure monopoly (n = 1) to pure
competition (n very large), with intermediate oligopoly cases in
between.
 For example, there are 4 firms in the market including B coffee shop and the three
remainder
We can easily calculate: Total qualities of the market:
Q = 24.4/(4+1) ≈ 19
P = 30 – 19 = $11
Thank You