Oligopoly Models with Beliefs and Strategic Interdependence
To examine profit maximization based on alternative assumptions regarding how rivals will respond to price or output changes, oligopoly models are categorized into two types viz. Collusive and Non-Collusive depending on the factors like Role of Beliefs and Strategic Interdependence. Managers beliefs – flow from the premise that oligopoly market decision making is characterised not only by own output but by output changes by the rival.The Below Tabular analysis gives a brief description about some non -collusive models.
No. | Type of Model | Beliefs | Strategic Interdependence |
1. | Cournot Oligopoly (Output Decision) | Each firm sets MR = MC; however, MR will depend on the size of Residual Quality.The more your rivals produce, the less you will.E.g. Aquafina Vs Kinley | Output drives competition; firms are naïve; are unable to serve the market completely |
2. | Bertrand Oligopoly (Price Decision) | Consumers buy from firm with lowest price.Firms produce what is demanded.React Optimally to pricesE.g. Pepsi Vs Coke – Price WarEach time a firm sets a price; its rivals will try to beat it. | Price (rather than Output),Marginal Cost Constant.The Firm will set P = MC as long as P > AC.Incentive to cheat and to drive each other to a very low equilibrium level. |
3. | Sweezy Oligopoly (Output and Price Constant) | Marginal Cost decreases at constant output.Demand is “Kinked”.Each firm believes that rivals will match price cuts, but not price increases | Profit Maximization – MR = MC |
4. | Stackleberg Oligopoly (Output determination of follower is residual) | Oligopolist looks at the competitive equilibrium.Profit Maximizing point for the Leader leads Follower’s Quantity. Followers take the Leader’s output as given. | There is no incentive to collude. |
5. | Contestable Markets (Incumbent – Entrant output and price game) | Possibility for one or a few firms to dominate the industry.Production of...