Consider a market consisting of two firms where the inverse demand curve is given by P = 500 - 2Q₁ - 2Q₂.Each firm has a marginal cost of $50.Based on this information we can conclude that aggregate profits in the different equilibrium oligopoly models will follow which of the following orderings. A)$\pi$^Bertand $\pi$^Collusion $\pi$^Stackelberg $\pi$^Cournot. B)$\pi$^Collusion $\pi$^Cournot $\pi$^Stackelberg $\pi$^Bertand. C)$\pi$^Collusion $\pi$^Stackelberg $\pi$^Cournot $\pi$^Bertand. D)None of the statements associated with question are correct.

Question

Consider a market consisting of two firms where the inverse demand curve is given by P = 500 - 2Q₁ - 2Q₂.Each firm has a marginal cost of $50.Based on this information we can conclude that aggregate profits in the different equilibrium oligopoly models will follow which of the following orderings. A)$\pi$^Bertand > $\pi$^Collusion > $\pi$^Stackelberg > $\pi$^Cournot. B)$\pi$^Collusion > $\pi$^Cournot > $\pi$^Stackelberg > $\pi$^Bertand. C)$\pi$^Collusion > $\pi$^Stackelberg > $\pi$^Cournot > $\pi$^Bertand. D)None of the statements associated with question are correct.

Quizplus · Accepted Answer

In this case, collusion leads to the highest profits as firms can jointly choose the output level that maximizes their joint profits. Then, Cournot leads to higher profits than Stackelberg because in Cournot, each firm assumes that the competitor's output is fixed and hence the competitor's reaction is less severe than what they would observe in Stackelberg. Finally, Bertrand leads to the lowest profits since firms end up competing over price and driving the price down to marginal cost.

Consider a Market Consisting of Two Firms Where the Inverse π\piπ

Consider a Market Consisting of Two Firms Where the Inverse $\pi$