• <b>United States Federal Reserve</b>

Intermediate Microeconomics


10. Oligopoly


An oligopoly is a small group of firms in a market with substantial barriers to entry. Because the number of firms in an oligopoly is small, each firm can influence the market price with their actions. Furthermore, the actions of one firm in an oligopoly affects rival firms. It is possible for firms in an oligopoly to act independently or collectively. When firms in an oligopoly collude, they collectively behave like a monopolist. In the majority of countries, explicit collusion among firms is illegal. Furthermore, private incentives make the cartel arrangements difficult to maintain. The Pencasts for this topic focus on non-cooperative oligopoly. In particular, the Pencasts cover three different models: the Cournot model, the Stackelberg model and the Bertrand model. In the Cournot and Stackelberg models, firms set quantities, and firms set prices in the Bertrand model.


[Download PDF]

Cournot Model: The Basics

This Screencast provides a general overview of the Cournot model. [Play ScreenCast]


[Download PDF]

Cournot Model: Market Demand

This Pencast describes the demand function that is will be used in subsequent Pencasts. In this example, we assume the following: the products are identical, firms have identical costs, and there are two firms in the market (i.e. a Duopoly). [Play Pencast]


[Download PDF]

Cournot Model: Marginal Revenue

This Pencast illustrates how to derive the marginal revenue functions for firms in a duopoly. To derive the marginal revenue function for both firms, we make use of the demand function described in the previous Pencast. [Play Pencast]


[Download PDF]

Cournot Model: Best Response Functions

This Pencast illustrates how to derive the best response functions for firms in a duopoly. It makes use of the marginal revenue functions derived in the previous Penast. In the application, it assumed that the two firms have identical costs. [Play Pencast]


[Download PDF]

Cournot Model: Equilibrium

This Pencast shows how to use the best response functions derived in the previous Pencast to compute the Cournot equilibrium. [Play Pencast]


[Download PDF]

Cournot Model: Graph of Equilibrium

This Pencast depicts the equilibrium found in the previous pencast by plotting both firms’ best response functions. The Cournot equilibrium occurs at the point where the firms’ best response functions intersect. [Play Pencast]


[Download PDF]

Stackelberg Model: The Basics

This Screencast provides a general overview of the Stackelberg model. [Play ScreenCast]


[Download PDF]

Stackelberg Model: Deriving the Leader’s Residual Demand Function

This Pencast shows to do derive the leader’s residual demand curve after accounting for how the Leader expects the follower to respond (relies on Follower’s Cournot best response function). We use the demand function described in the first Pencast in this series; assume that both firms in the duopoly have identical costs; and assume the products sold by both firms are identical. [Play Pencast]


[Download PDF]

Stackelberg Model: Equilibrium

This Pencast illustrates how to compute the Stackelberg equilibrium. In particular, it shows how the leader chooses its output and how the follower chooses its output. The sum of these output choices is the Stackelberg equilibrium quantity, which determines the Stackelberg equilibrium price. [Play Pencast]


[Download PDF]

Stackelberg Model: Graph of Equilibrium

This Pencast graphically depicts the Stackelberg equilibrium computed in the previous Pencast. [Play Pencast]


[Download PDF]

Cournot versus Stackelberg: Profits

This Pencast computes the profits earned by firms in a duopoly under Cournot and Stackelberg competition. It is demonstrated that the leader in the Stackelberg model manipulates the follower and profits at their expense, while both firms in the Cournot model earn the same profits. [Play Pencast]


[Download PDF]

Cournot versus Stackelberg: Inefficiency

This Pencast illustrates the inefficiency (mutually beneficial trades that do not take place) that results from Cournot and Stackelberg competition. Both of these equilibria are compared to the competitive equilibrium, which maximizes welfare. The Pencast shows that Stackelberg competition produces less inefficiency than Cournot competition (relative to perfect competition). [Play Pencast]


[Download PDF]

Cournot and Stackelberg Models: Extensions

This Screencast discusses the key assumptions of the Cournot and Stackelberg models, how the assumptions could be relaxed, and the implications of relaxing particular assumptions. [Play ScreenCast]


[Download PDF]

Bertrand Model: The Basics

This Screencast describes the basic features of the Bertrand Oligopoly Model. [Play ScreenCast]


[Download PDF]

Bertrand Equilibrium with Identical Products

This Pencast describes the Bertrand Equilibrium when the goods being sold are identical across firms. Ultimately, the outcome is the same as would occur in a competitive market, an indication that firms are unlikely to set prices when their output is identical. [Play Pencast]


[Download PDF]

Bertrand Equilibrium with Differentiated Products: Part I

This Pencast sets up the problem faced by firms in a duopoly that set prices. The information given in this Pencast is used in the three Pencasts that follow.[Play Pencast]


[Download PDF]

Bertrand Equilibrium with Differentiated Products: Part II

This Pencast uses the information in a previous Pencast (i.e. Part I) to determine firm 1’s best response function. [Play Pencast]


[Download PDF]

Bertrand Equilibrium with Differentiated Products: Part III

This Pencast uses the information in a previous Pencast (i.e. Part I) to determine firm 2’s best response function. [Play Pencast]


[Download PDF]

Bertrand Equilibrium with Differentiated Products: Part IV

This Pencast uses the best response functions derived in previous pencasts (Parts II and III) to find the Bertrand Equilibrium. [Play Pencast]


Return to Intermediate Microeconomics Home