Section IV -

Equilibrium with Many firms

 We saw above in a duopoly that owners may distort their managers' incentives if each firm's manager
reacts to distortions in the competing managers' incentives. It is natural to ask next if these distortions
of owners' incentives disappear as the industry is less concentrated.
 THEOREM 4: As n approaches co, the firms' n managers become profit rnaxinzizers, that is, a,+ 1, if a
is uncertain, b is uncer- tain, or costs are equal but uncertain in stage
 one.
 Theorem 4 perfectly justifies this through first order and second order conditions and
is intuitively appealing because it coincides with our idea of a perfectly competitive
market.
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 With free entry firms really can’t afford to do anything other than profit
maximization. If any firm deviates from them then it is AC is going to rise above the
market price.
 Profit maximization only in monopolistic and competitive sectors other than that
oligopolistic competitions non profit maximization incentives can be given

Section V –
Incentive equilibrium with price competition in a differentiated product duopoly.

 The analysis of incentive equilibrium in a differentiated market is similar to the analy- sis in Section IV
with one exception-now we assume price competition between firms selling differentiated
productsinstead of Cournot-quantity competition.
 THEOREM 5: When price is the strategic variable in the second stage of the competition among
diferentiated producers facing linear demand, a , > 1, that is, the incentive equi- librium is such that
managers are ouercom- pensated at the margin for projits.
 The crucial difference between this case and the Cournot-quantity case is that here the reaction curves
in prices slope upward, that is, the greater a firm's expectation about its opponent's price, the greater
will be the price he chooses.
 Comparison between Cournot quanitity and Cournot price competition -