Oligopoly and Duopoly

Oligopoly is a
market form in which the number
of sellers
is quite few and
they are affected by the behaviour of each
other. In other words, there is
mutual
between different firms of the market. interdependence
Some economists
of the view that
are
commonly prevalent market form. Butoligopoly
is a very
the attention of
economists towards this market form was
drawn much later.
Earlier economists were
mostly concerned with either perfect
competition or
monopoly markets. Even Mrs. Joan Robinson
and Chamberlin focussed their attention towards
Competition only and did not pay attention monopolistic
to the main
characteristic of oligopoly i.e. mutual
However, in later years, many economists, interdependence.
Stigler, William Fellner, Paul Sweezy and Vonmainly George
studied the behaviour of firms in Neumann
oligopoly.
There
are some
definite theory of
practical difficulties in developing a
oligopoly firm's equilibrium. Firstly, the
olbgopoly may take several forms, like the firms
(almost) homogenous products, like cement, iron manufacturing
& steel and
petroleum or firms manufacturing differentiated
cars, products like
refrigerators, air conditions etc. Thebehaviour of firms
in these two market forms will also be
different.
Second difficulty is uncertainty of behaviour. Sometimes
the
oligopoly firms resort to collusion, like fixing
limits or ceilings (as is often done production
by OPEC countries), division
of market etc.
and sometimes
they resort to cut-throat
competition. This uncertainly of
behaviour precludes the
 Managerial Ecmm

32 c o n s i s t e n t
theory.

th
d e v e l o p m e n t
of any
in
veloping
developing
a uniform
uniform
theory of
problem
mutual
interdependence. amor
interdependen

Third is
equilibrium
deciding iits
deciding
before
s nex
firm/seller,
oligopoly
firms. Every anticipated
behaviour of
behaviour of }his nvais
ditterent
ot the behas
makes a n
estimate
based o n
his expected
this e x p e c t e d behavoUT

decides his step, expected lines.

o n expected
o t on
not
th
ther
and then rival:is n
l 1S
behaviour of the
and if the its
behaviour.

will immnediately change

it
that in this market,
non-prie
The fourth problem is whic
than price competition
prominent
competition is
m o r e
b e h a v i o u r . This non-pric

further increases
uncertainty of
with regard to product design
packaging
competition may be consistent
ete. Developing a
after sale services, advertising
factors is nuch more dittiult
theory from these qualitative

The last problem in this regard is

that the tirms are nx
but
often motivatad towards maximisation of current protit
ar tumovNr
are more interested towards marimisation ofsales

which may even adversely aftact current prtits.

Because of the above factors, no unitorm theory oi
oigopoly market has emerged. Each eronomist has presdNa
the theory as
per his own set of assumptions The mst opu
of these theories is the Paul Sweezy's kinked demand cune
theory, which analyse first. Then, we take a n
we ther
models of
oligopoly and duopoly behaviour.
Kinked Demand Curve
Theory
According this theory a'firm's to urnter
O4gOpoly 1S downward sloping from left demand curve nåai
to right but iN SEN
and the kink is
at the current m
figure 16.1.
igure 16.1 Current price leval
levyl This
Inis sis shown
We that the
see
sloping it is neither demand
but curve D=AR is downw.and
line whih a
straight line nor is d
takes a aight nor a curved one. t
current sharp turn at point cur F is t
OM equilibrium
output. This point the firm
of poin B. This point ES
and
OP|prir
demand curve muicatin
haiicaing t slo
shows two ditferent slys
Oligopoly and Duopoly 333

The portion of the demand curve above E has a low slope (it
is more elastic) while the portion below point E has high slope
(it is less elastic).
Figure 16.1
Kinked Demand Curve in Oligopoly

P
P,
Price
D- AR

M, MM,
Output
The reason for this unique type of demand curve is the
assumption about the other firms' behaviour. It is believed
that if a firm/seller decreases the price of its product, then
other competing firms follow suit and reduce their prices also.
Consequently, the expectation of the first firm about a
substantial increase in his sales is not fulfilled. In other words,
new customers are not sufficiently attracted because other
products have also become cheaper. If, however, he raises
follow him (i.e.
theprice of his products, then others do not
do not increase the price of their products). As a result,
they
his products become relatively expensive and demand for his
other words, price increase
products decreases substantially. In
decreases sales substantially but price reduction does not
we see in the above
increase sales to any significant extent. As
igure, if we increase our current price by PP, then quantity
demand decreases substantially by MM, while if we decrease
it by the same amount then there is only a marginal increase
of demand by MM,. In this way, demand curve is highly
 Managenal Esness
increases but is veryinelastic t0
nw:

toprice
elastic
Faced with this scenario, the best course for the firm ic
the present price,
nejther increase it nor red t o st
stability in it. That is
to

why, there is much greater rigidity or

markets. oligopoly
This is maintained even when
rigidity there is
change in cost conditions. In other market forms, equilibrSOme
is immediately affected if there is
any change in
conditions, but it is not so
in oligopoly
markets. cost
by the following diagram.
This we show
Figure 16.2
Price Rigidity in Oligopoly

MC,
AC,
Price MC
AC

D- AR

MR
In the Output
above
marginal revenue diagram
curve
the demand curve is D = AR. The
curve is D
which is of a
for this average A MR
per the typical shape. Up to OM revenue curv
there is aupper portion of the quantity it
cou
as

This steep fall in this demand curve,

urve, but
but at point I
the steep fall is on curve, shown at
n by the dotted RS.
demand curve. account of the sudden dotted i of
(MC) curves cut The average ange of slope
change
rage cost (AC) and a al cost
curve cuts this
MR at thisMR curve marg
ma cost
between
en R andS. Si
level, therefore, and
ace MC
MC
e, equilibrium point 'e'
equilibriun"
Oigopoly and Duopoly 335

andoutput OM is fixed. Now, if some small changes in AC,

MC take place as is shown by a little upward shift in these
curves (AC, and M), even then the new equilibrium point
remains between R and S, and hence equilibrium output and
rem

riceare not affected. Yes, if, some substantial change in cost

conditions take place, then definitely the equilibrium output
and price will be affected.
In this way, we can say that there is price stickiness or
price rigidity in oligopoly markets. Whatever price has come
to stay will stay for a long time and frequent changes will not
take place.
Price Leadership
Another theory which explains oligopoly behaviour in
some cases, is called Price Leadership Model. This situation
exists, when in an oligopoly market there is one strong
dominant firm and others are small firms. In this case the
dominant firm controls a big chunk of market (usually not
less than fifty percent) and the rest of the market is shared by
several small firms. The small firms are not in a position to
influence the market price and quantity and, therefore, becomne
the tollowers of the dominant firm. This is called price
leadership by a dominant firm.
In such a situation the dominant firm decides the price
of the product and the other small firms follow the price, i.e.

they have no option but to sell their products at this price. In

other words, the dominant firm is the price maker while other
irms are price takers only. Under price leadership the
dominant firm faces a monopolistic situation, that is to say,
thedemand curve facing it is downward sloping and
accordingly, the marginal revenue curve is also downward
ngThe small firms are price takers and their behaviour
ke a firm in perfect competition market. They will be said
E Tacng a horizontal demand curve and a similar marginal
revenue curve, at the price fixed by the dominant firm. The
briunm of market in such a situation can be explainea in
the following manner.
 336
Managerial Economics
Figure 16.3
Price Leadership Equilibrium

Price, Revenue Q /MC

& Cost

MR
M, M M
In the above Output
and SS, is the diagram DD, is the market
the small firmssupply curve. This demand curve
who supply curve is formed
as
they do in collectively
perfect make this by
the market.
price
It
'd' the
cancompetition). A supply
fill up the
curve (just
dominant firm enters
small firms are gap left by the small firms. At
and the demand for
so able to meet the
entire demana
lower price, the large
and the there is some gap dominant firm is nil. At a
supply which between the
This
gap is met by the the small firms cannotmarket demana
every price
(lower dominant firm. hope to meet
the
demand curve than d) is exactly equal Hernce, its demand a
SS. For DD, and the to the
gap berwc
example,
RT and this
is
at
price supply
upply
P, the p curve (of.small
(Or siapD.firms)
In this
way, the
equal to the
demand
gap betweee
between S51 anc DD, isis
SS and
has been drawn. demand curve of the domir
facing dominant firm PQ.
the dominant
dominant firm
* dd
The MR
dominant firm,curve is the marginal revenue curve
MC is the
dominant marginalcorresponding
cost to its demand
urve facing the
ra The
dd curve
firm curve which
dominant firm isat point So, thee.
curve
cuts the MR
curve off the
l the ofthe

accordingly, wouldOM.be OP equilibrium

The price equilibrium
fixed
quantity
qua
byy the dominantt firm,
firm
(or QM). dom
Ogypoly and Duopoly 337

Once the price and quantity has been fixed by the

minant firm, other smaller firms go to grab the rest of the
market at the price already fixed by the dominant firm. Their
curve at the gIven price gives an output of OM. Hence
supply
the total market demand of OM at the price OP is met by the
dominant firm as well as the small firms. The dominant firm
naduces an output of OM, while the small firms produce
and supply a quantity OM, This together is equal to the total
market demand of OM (OM, +OM. = OM).
In this way market equilibrium is obtained in oligopolistic
price leadership.
The Price leadership model under oligopoly may be
explained by the following illustration.
Suppose there is a market with a demand function Q,
=

140 2P. It has five small oligopolists, each having a supply

function of Q, = -2+ 0.2P. A large firm enters the market and
brings down the market price with the result that the small
tarms have no option to sell their products at the price fixed
by the dominant firm. The dominant firm estimates
curve as Q, =150
its demand
3P and its total cost curve as 50+ 10 Q+
(1/3) Q. The dominant firm is profit maximiser.
Find
) The price in the market when there is no dominant tirm.

() The price after the entry of dominant firm.

h e market share of the dominant and the small tirms.

(Uv) The profits of the dominant firm.

Solution
Market Demand function 140 2P
larket Supply function (-2 + 0.2P) x 5 = -10 + P

Market Equilibrium
140 -2P = - 10 + P
 338
Managerial Economics
3P 150

P 50

Q 40

dominant firm's demand function

(i) The
Q 150 -

3P

P 50 (1/3) Q
TR 50 Q - (1/3) Q

MR 50 (2/3) Q
MC- 10 + (2/3) Q

(i) Equilibrium of dominant firm

MR = MC

50-0-10+£0 3

40
Q 30
P 40
It means the
dominant firm's profit maximisation is at
the price of Rs. 40 and its
output is 30 units. The small firm5
are forced to sell at this
30 units. price and their output wil be 10* -

Market demand at a
price of Rs. 40
140 2x 40

So the total
60 units
market
by the dominant firm anddemand of 60 units is shared e lally
the small firms. The
firms is 6 units each. output by >"*
Oligopolyand Duopoly
339

dominant firm
(iv) TR of
=
40 x 30 1200
TC of dominant firm
50+ 10 x 30(1/3) 302
=
50 +300 + 300 650
Profit of dominant firm
= 1200 6 5 0

Rs. 550
Baumol's Sales Maximisation Model
Prof. William J. Baumol has given his model of 'sales
maximisation.' According to him, the oligopolists are not
always looking at profit maximisation. They have a long termn
perspective of growth and domination of the market and they
are
not aiming at the immediate profit maximisation. They
Would not mind a lower current profit if it can ensure
greater
profits in future. This objective of growth and future profits is
more easily fulfilled by current sales maximisation rather than
current profit maximisation.

Accordingly, a firm will find its current equilibrium ata

POint where sales are maximised in value terms. This is
maximisation of total revenue (TR). If we recall the total
evenue (TR) and total cost (TC) curves technique given earlier
In chapter 14, we can find out the output level where TR is

maximum. In the following figure we present the sales

maximisation model.
 340
Managerial Economics
Figure 16.4
Equilibrium by Sales Maximisation

R TC

TR
Revenue,
Cost

FC

L
M, M IN
Outpu

Profit
O

M, M

Output Profit Curve

In the
above upper
level of portion of figure
curves. At
OM,
maximum, and hence aoutput the 8ap
re we
we raw TR and TC
gap betweendravy
between TR and TC TC iss
equilibriumat
our sales revenue
profit
this output level. maximising firm TK
wiu find its
irm will
this TR then However, if we are ma imising
or
point although total
relatively less (RS). equilibrium utput isis OM
revenue is greater output Oi
At
but total
tota" profit is
,
 341

ot this tigure we show the profit

lu the lower portion

uVe
(whi h,
intact, isTR- "TC). Thiscurve is initially negative
INhee T iN grealer TR), then it
thanlater is zero(whereTC="TR
breah v e n pont) anl on it is positive, At OM, output
AtOM output profit
pntiteurve in showing sles are profit.
maximum
nmaximum and at N the TC
is telatively less although
hence profil is also zero, after which it
Is ual to TR and
wimes negative.
will find the equilibrium of a sales
ln this way, we

mavumisinyg tirm.
This can be explained by the following
numerwal example. Suppose,
A tirm in is facing a demand function Q, =100
oligopoly
2: the total cost function is TC = 200 + 2Q + 0.1 Q.

of the firm
0) Find the equilibrium output, price and profits
f its objective is to maximise sales.

() It the firm acts as normal profit maximising firm, find

a

its price, output and profits.

(11) If the firm is sales maximiser but wants a minimum profit
of Rs. 725 then what shall be its price and quantity.

Solution
then the
)
I adopts a policy of sales maximisation revernue
the firm
Tirms equilibrium is found at a point where to
total
1s maximised and we know that TR will be maximised

where MR-0.
For the firm
P- AR-50-0.5 Q
TR 50Q- 0.5 Q
MR 50- Q-0

Q 50

f
oulput is 50
Then price 50-(0.5x 50
 43

- 5025 Manngennd
-Ra. 25
The profit of the tirm ahall
b
Profit TR TC
(50 x
25) - (200 +2 x
50 +0.1 50
1250 (200+ 100+
-

25%
1250-550
- Rs. 700

(i) If the firm acts

as a
normal profit
maximiser then
MR 50 Q

At Bquilibrium MC-2+0.2Q
MR MC
50 Q-2+ 0.2 Q
1.2 Q48
Q 40 units
Price in the
market
P -50 0.5 x
40
-50 20
Profit of the firm -Rs. 30
Profit TR TC
(40 x
30)- (200+2 x 40 + 0.1 x40)
1200 (200
+80 + 160)
-1200 440
-Rs. 7600
Cigroyand Duopoly 343

maximiser s profits shall be greater than a sales

A profit
maximisers profits.
725
)Output
at a Profitof Rs.
725 TR TC

725 (50 Q -0.5 Q) -

(200 20+0.1 Q)
725 (480 - 0.60 200)
or0.6 Q -

48Q+925 =0
the nature of
This is a quadratic equation in
axbx t c =0
as
The values of a, b and c can be presented

a =0.6; b = -

48 and C =925
The value of Q

-bt vb- 4ac

2a

0.6 925
4 8 ) -4
x
x

=
-(-48)
2 x 0.6

48 2304 -

2220
1.2

48 V84
12
f we take +, then

O-48 +9.1657.l6 =47.63

1.2 1.2
If we take -, then
 344 Managenal
48-9.16 38.84
= 32.37
Q- 1.2
1.2

Since, the firm adopts sales maximisation.

47.63 units of output, instead of
it w
equalibrium at
Price shall be 50 0.5Q
3237
50 0.5 x 47.63

50 23.81 26.19
A summary of 3 situations is as follows,

Firm's Strategy
Variables Profit Sales Sales
Maximi-Maximi-| with Profit constrai
Maximisaticn
sation sation o f Rs. 725
Equilibrium
Output 40 50 47.63
Market Price 30 25 26.19
Profit 760 700 725.

DUOPOLY
A
special form of oligopoly is called a duopoly m e
where there are only two
The
duopoly market theorysellers, competing with ea
has a unique
becauseas the theory of duopoly place in e
early 1838, when the behaviour was
devehad
theories of other
other market forms had
not
aftercrystallised. Even the marker
1930's. oligopoly market analysis,came on
goes The
to the
credit for first developing a duopoly market
goes to the French economist
in1838. A.A. gave

version ofThereafter, many other Cournot. wi eo gave Ve their

duopoly behaviour. Weeconomists

some of these a uss
are oing to discuss
hen

models. gong
oligopoly and Duopoly 345

Cournot Model

Augestine Cournot a French economist and engineer had

developed this model of duopoly behaviour. In this model he
had assumed.

) That the cost of production was nil for both the sellers
and

( Each seller had assumed that the rival seller will keep his
output unchanged on account of any change of output
by him.
His model can be explained as follows.
Figure 16.5
Cournot's Duopoly Model

Price

D
L M
Output
curve
the market demand
Suppose, in the above diagramand the costs are zero tor
1s DD. There are two sellers only of two sellers who
Doth of them. (Cournot gave the example
Duopolist A who enters
controlled mineral water springs).
whole demand curve
and who looks at the
tne market first the price O] and the
rles, to maximise his profit by fixing so that
at OL which is 2 of total market size of OD,
output the MR at this point L
are OJKL This is because
us profits maximising
will be zero and since MC is also zero, it is profit
output.
346 Managerial Economics
The duopolist B, enters the market and finds that only
the KD, segment of the demand curve is available to him. He
will try to maximise his profit within this demand segment
He gets the maximum profit output of LN which is 4 of the
total market size of OD, (Where Nis the middle point between
L and D,). This is so because the MR of this demand segment
is zero at N level of output. The price fixed by him would be
SN or OR. As a consequence of this action by B, duopolist A
will also be forced to sell his product at the same price and his
profits would fall.
A would then reappraise his position. He would then try
to cover the market, not covered by B i.e. % of the market size.
He would then try to find his equilibrium by supplying h of
this market demand. When A modifies his
output, B will be
forced to do the same and he will now
try to supply the half
of the residual market. The
process will be as follows:
Output by each duopolist as proportion of total market size.

Stages A B

II 1
8 of a-
III 21
2 of (l 64
IV
of (1 64 128 of (
43
128
85
256

3
 347
INe. find that in each subsequent stage A decreases his
i t u t as a reaction to B's output and B increases his output
s a eaction to A's output and finally, both reach an output
leyel of 1/3 each. So the total output of both the duopolists
wtll he 2/3 of OD,, i.e. OM, shared equally by A and B.
aturally, as per the demand curve DD,, this output can be
sld at price OP. This output OM is shared equally by A and
BS that A gets output OT and B gets TM and their profits
ane OPQT for A and TQEM for B respectively.
In this way we find that under duopoly market E will
be the equilibrium point on the demand curve and total
output will be OM and share of each seller is 1/3d of the
total market size.

This analysis can be generalised for oligopoly market also.

n is the number of sellers in a market, the share of each
covered would be
seller would be 1/n+1 and the total market
n (1/n+1) Suppose, there are four sellers in an oligopoly
and the market
market, the share of each would be 1/5 would
covered would 4 1/5 4/5. The price of the product
x

be fixed accordingly.
In the above market, for example,
if A had been aa
which
he would have fixed price OJ and output OL
monopolist
WOuld have given him the total profit
of OJKL. If there are
OM and the profit is
wo sellers, the price is OP and output
have been three sellers,
the price
also reduced. If there would
each
Would have been OR and output
ON (shared 1/3rd by
as the number
of sellers
Seller). In this way, we find that
Lncre.asesthe price goes on diminishing output
and goes on
number of sellers (like
Hence, if there are large
ncreasing. would have reached OD,
pertect competition) the total output
This proves
would have reached almost zero.
and the price the lower would
be
competition,
at greater the degree of
the price charged from the consumers.
 348

Reaction Curves
Cournot's theorem can be explained thrvugh the conen
of 'Reaction Curves' or 'Reaction Functions, A reaction quns
explains the output of a seller in response to the output ot th
other seller.
The opportunity for production arises tor a seller
on
when one seller leaves some portion ot the market
If a firm sells the quantity equal to the total market
uncoverai
size, then
there is nothing for the other firm and its
zero. However, if one firm leaves some
quantity willbe
portion of market
uncovered, then there is an opportunity for the other firm to
sell some quantity and
going by the rule of profit mavimisation
he would like to sell half of this
uncovered market. The larger
the uncovered
portion by a firnm the greater is the
for a firm to increase its opportunit
output.
In the above
100 units (at
example, suppose the total market size is
zero
is zero. In other
price) and at a price of Rs. 100, the demand
words, we assume a
simple demand functions
Q 100 P
We move on with the
firms have earlier assumption
that both the
zero costs. In
i.e. the such situation, the reaction table.
a
output
firm will be as
of a firm in
response to the output of the other
follows
Table 16.1
Duopoly Reaction Output
Output of
Firm A Uncovered Output of
Portion of market
Firm B
2
100 3
90 0
80 10
5
70 20
10
60 30 15
40 20
Oligopclyand DuopoBy 349

50 50 25
40 60 30
30 70 35
20 80 40
10 90 45
0 100 50
of firm B increases in reaction
We thus see that the output
between
of firm A. Therefore, relationship
to the output find that
1 and 3 is the reaction output of firm B. We
column and its
A produces 100 units, then firm B has no scope
if firm then
zero. If, however,
firm A produces 90 units,
output is
has the opportunity to sell 5 units for its profit
firm B B
If firm A sells 80 units of output then firm
maximisation.
will sell 50 units
sell 10 units and if A sells 0 units then B
will can similarly make
maximisation and so on. We
for its profit of B.
a reaction
table of A for any output
the
has an output
level as a reaction to
Thus, each firm
can be shown
in the form of
other firm. This
output of the
following reaction curves.

Figure 16.6
Reaction Curves

100

Reaction Curve
of A for B

50

Firm B

33s Reaction Curve

o f B forA

100
50
333 FimA
 350 Managerial Ecomomirs
The equilibrium output takes place when their .
ir reactio
other. In this
curves intersect each way graphically we can
explain the Cournot's equilibrium.
Theabove reaction curves can be easily found
mathematically deriving the reaction functions of both by
firms. We proceed with the assumption ot zero cost.
the
Given
Q 100- P
Hence P 100-Q
Firm A proceeds to maximise its profit
(1 TR, - TC,

-(Px Q,) (AC Q, -

(Since cost is assumed to be nil (AC QA) can x

be
Replace P with 100 - Q
ignored

(100 (100 Q) Q
-[100 (Q, +2,)1Q,
=
100 QQ-, 9
Maximise

A 0
dQA =
=

100-20a-2
2Q, 100 Q,
Q 50- 0.5 Q,
This the reaction
is
firn B. function of firm A to the
Similarly,
of firm A is
the reaction
function of output
firm B to the
outpu
Q, 50- 0.5 Q,
1.
Replacing Q, in thhe first reaction
Since 'P'
usd to indicate price, Latin function
1s
sed to
Indicate profit. term 'TT' (par)
Wigopndy and Duopoly 351

Q- 50-0.5 (50 -0.5 Q)

-50- 25 +
0.25 Q
Q-0.25 Q, 25
0.75 Q 25

25-333
0.75 33
Similarly

Q 33
reaction functions
Readers should note that the
correspond to the table and the
developed above, exactly
graph above.
mathematical form
The of reaction c u r v e s or its
use
tool to explain the
reaction function' is a very powerful
model. This also liberates the model from the
Cournot's
even identical costs.
With the help of
limitation of zero cost or
reaction functions' we can find market and firms, equilibrium
costs or even different
costs (See
when the firms have uniform
appendix to this chapter).
The Chamberlin Model
in developing
w a s the pioneer
E.H. Chamberlin, who studied the
Cournot
competition,
theory of monopolistic because, it resulted
in lesser
model and found it imperfect, could otherwise get.
total profits to the firms than they
intelligent
added that each duopolist is a fairly
Chamberlin interdependence,
recognise the mutual
Seller and duly
they which

would not adopt a price policy,

and, therefore, they
reduce the profits of both of them.
Would
would adopt a price
Chamberlin, duopolists
According to therefore, explained
their profits.
He, the
maximises on
which also proceeded
policy follows. He
behaviour as
auopolistic costsS.
Cournot's assumption of zero
 352 Managernal Loonemis
Figure 16.7
Chamberlin's Duopoly Model

MR

P'ice

Demand Curve
O
M N
D
Quantity
According to Chamberlin each
the maximum
revenue duopolist understands that
OM, where MR is zero,they can get is at
price OP and quantity
of a lower and therefore, the Cournot's solution
price is not
optimum.
second
duopolist
that in order to enters According
the market, the
to him, when the
sell a first seller
seller would recognises
reduce the quantity greater than OM, the second
would also be price and, therefore, he
first forced to reduce his (the first seller)
seller) price. Therefore, he (the
market to thereduces his output to give some
second seller. portion of hnis
The second
selling at
seller also seizes the
the
given price instead of a opportunity starts
process continues till
market because, the first lower price anuie
(SN. This
this is the seller has vacated
acated half
had halr of
or the
expected to sell even at a
maximum that the second seller
Finally lower price se orN.
the second therefore, the first
e
(half of MD, MN
of
seller TM seller roduces OT units and
Their
profits are equal units and both ofproduc
strategy has i.e. OPRT themm sell
sell at
at
price OP
p
than what we helped each of
and TREM
them respectivesy This
This
disturb this get in as their profits
Cournot's model. profits are
ar
ater
arrangement as it is They
hey are
are
n
to not likel to

beneficial to both.
 Managernal Economics
360

= 91 units

market
Price in the the
P 75-0.5 x 91

= 75 45.5

= Rs. 29.5 or 29 %

The profit of firm A

I TRA - TCA
= PxQ-AC Q
29.5 x 49 - 5x 49

1445.5- 245
Rs. 1200.5
The profit of firm B

T =

TR, TC -

- PxQ, -0.1 * Q,
=
29.5 x
42 0.1 x 422
1239 176.4
= Rs. 1062.6

In this
way under the conditions of unequal cost
conditions the equalibrim
is determined. price, output and profit of each firm
The Stackleberg Model
This model of
developed by oligopoly/duopoly
the German economist behaviour was
in 1934 and is an Heinrich von Stackleberg
it is assumed
extension of Cournot's model. In this
that one of the model,
the other as a duopolists
follower. The leader is a
acts as a leader
ana
recognises that his sophisticated firm wn0
competitor acts on Cournot's assumptior
Olgopoly amd Duopoly
361

He incorporates the reaction curve of his competitor into his

OWn profit function and then he proceeds to maximise his
output like a monopolist. This situation is also called as
'quantity leadership.
We can find Stackleberg equilibrium on the assumption
of zero cost as follows:
Suppose the demand function is
Q 100 - P and
P 100 Q
There are two firms in a market and tkheir output isS
denoted as Q, and Q
The reaction curves of each of them is-

50 0.5 Q
Q, = 50 0.5 Q

The firm A's profit function is

11 = PxxQ
= [100 QQ

=
[100 (Q, +Q)]Q
100 Q Q- -

2,0,
100 Q-Q -

Q, (50 0.5 Q)
100 Q , -50 Q,+0.50
=
50 Q -0.50
maximise II

dlla =0=50 QA
dQA
50
function ot tirm B
the value of Q, in the reaction
Putting
 362 Marnagerial Economics
= 50 0.5Q
Q
= 50 0.5 x 50
Q
50 25
25
So, when A acts as a leader and B as a follower, the output
of each of them is 50 units and 25 units
output is
respectively. Total
50+25 75
Price 100 75 25
The Profit of firm A is

= Px Q
= 25x 50
Rs. 1250
The profit of firm B is
=
P x
Q
25x 25
= Rs. 625

When we
equilibrium, thecompare the
Stackleberg with the Cournots
following comparative position emerges
Cournot
Market Price Stackleberg
Rs. 333
Rs. 25
Output of each
331 Units 50 and 25 units
Total Output
Profit of each
662% Units 75 Units
Rs. 1111 each
Total Profit Rs. 1250 and 625
Rs. 2222
Rs. 1875