BASIC OLIGOPOLY MODELS

1. The different types of oligopoly markets are Collusive and Non-Collusive. In this type
of market, there is an agreement between the oligopolists to have a common price, their
agreed price, manipulate their product outputs in order to arrive at their own business
interest. Oligopolists agree together with respect to both price and production in order to
gain maximum profits. Thus, the demand curve is inelastic.
On the other hand, Non-Collusive oligopoly makes the demand curve elastic. This is
because in this market, oligopolists do not practice collision.

2. The profit maximization under collusive oligopoly is deemed to be the same as with
pure competition. As what I’ve mentioned, oligopolists agree to a certain price to achieve
their targeted profit. They become dependent of each the price and level of output to sell in
the market.
Since in non-collusive market, they don’t agree to a common price, the oligopolists
make an independent price and level of output based on how they see their competitors will
react. If firms under this market are producing homogenous products, there could be ‘price
war’, especially during price reductions.

3. The Cournot model considers firms that make an identical product and make output
decisions simultaneously, while the Bertrand model considers price competition. They deem
that firms produce identical products but compete on price and make their pricing decisions
simultaneously. Another is that, Bertrand model assumes that each firm expects that the
rival will keep its price constant, irrespective of its own decision about pricing.

COURNOT MODEL

Assume that firm A is the first to start producing and selling mineral water. It will produce
quantity A, at price P where profits are at a maximum. At this point MC — MR = 0. On the other
hand, firm B assumes that A will keep its output fixed (at 0/1), and hence considers that its own
demand curve is CD’.

Hence, firm B will produce half the quantity AD’, because, under the Cournot assumption of
fixed output of the rival, at this level (AB) of output (and at price F) its revenue and profit is at a
maximum. B produces half of the market which has not been supplied by A, that is, B’s output is ¼ (=
½. ½) of the total market.

BERTRAND MODEL

Bertrand’s model leads to a stable equilibrium, defined by the point of intersection of the
two reaction curves (figure 9.13). Point e denotes a stable equilibrium, since any departure from it
sets in motion forces which will lead back to point e at which the price charged by A and B are
PAe and PBe respectively. For example, if firm A charges a lower price PA1, firm B will charge PB1,
because on the Bertrand assumption, this price will maximize B’s profit (given PA1). (referred to
economicsdiscussion.com)