Question

Provide a real-world example of a market that approximates each oligopoly setting, and explain your reasoning.

a. Cournot oligopoly.

b. Stackelberg oligopoly.

c. Bertrand oligopoly

Short answer

1. The Cournot oligopoly model establishes that rival companies will produce a level of output regardless of the output of rival companies, a homogeneous product.
2. In the Stackelberg oligopoly model as in the Cournot model, there are few firms for a large number of consumers and the product of these firms can be homogeneous or different.
3. On the Bertrand oligopoly, the equilibrium occurs when the prices of the firms are equal to their marginal costs, therefore, the firm that has a marginal cost less than the equilibrium will have incentives to lower its prices and have a greater market share.

Step-by-step solution

 Step 1: Explaining the reasoning for Cournot oligopoly

a.

The Cournot oligopoly model establishes that rival companies will produce a level of output regardless of the output of rival companies, a homogeneous product. That is, the companies will be followers and there will be no leading firm, but without causing the rival to respond to their actions, therefore the rival's production is fixed and this makes the term of the conjectural variation of production zero for both firms.

An example of this type of oligopoly can be the utility companies such as electricity, which have very few rival energy companies that own the entire market share and there are high barriers to entry, and both will hold output constant, and the only thing that will change will be the price that each one will charge for the energy service.

 Step 2: Explaining the reasoning for Stackelberg oligopoly

b.

In the Stackelberg oligopoly model as in the Cournot model, there are few firms for a large number of consumers and the product of these firms can be homogeneous or different. However, there will be a leading company that will be the first to make the production decision, and based on this, the other firm will be the follower, which will establish an output level according to the decision of the first.

An example of this is the power that American Airlines exercises in the aeronautical market over small airlines such as Spirit, JetBlue, and Sun Country Airlines, in which American controls many routes, airport spaces and low prices, so the other airlines must establish their costs and output levels based on AA decision.

Explaining the reasoning for Bertrand oligopoly

c.

On the Bertrand oligopoly, the equilibrium occurs when the prices of the firms are equal to their marginal costs, therefore, the firm that has a marginal cost less than the equilibrium will have incentives to lower its prices and have a greater market share. It must be taken into account that in this model there are very few firms involved that produce homogeneous goods.

An example of this oligopoly model is the one that can be generated in commodities or raw materials. For example, mango-producing companies in Costa Rica that export to the United States. A company that can reduce its marginal costs due to, for example, a technological improvement, will be able to offer a lower price and generate more trade with US food importers.