Question

Determine whether each of the following scenarios best reflects features of Sweezy, Cournot, Stackelberg, or Bertrand duopoly:

a. Neither manager expects her own output decision to impact the other manager’s output decision.

b. Each manager charges a price that is a best response to the price charged by the rival.

c. The manager of one firm gets to observe the output of the rival firm before making its own output decision.

d. The managers perceive that rivals will match price reductions but not price increases.

Short answer

a. Both firms will have the same cost function.

b. Price decrease will end when prices equal marginal costs and the profit of both firms equals zero.

c. The managers of the following firms will decide an output level normally lower than that of the leading firms.

d. The rival firm with a lower price can take advantage of to have a greater market share.

Step-by-step solution

Determining neither manager expects her own output decision

a.

This scenario reflects the characteristics of the Cournot oligopoly model since it establishes that the few firms that exist in the market will establish their own output level and this will not affect the output decision of rival firms since both firms will have the same cost function.

 Step 2: Determining each manager charges a price

b.

The situation in which each manager of two rival firms establishes a price that responds better than the rival firm's price, responds to a Bertrand oligopoly situation. This is because in this model consumers have perfect information on the two identical products from the two firms. Therefore, consumers will not care to buy from firm 1 or firm 2. This will result in firm 1 deciding to cut the price of its good to obtain a greater market share, but firm 2 observing this it will reduce the price to the same level or even a lower price as long as the marginal revenues are equal to the marginal costs of the two firms.

Hence, this price decrease will end when prices equal marginal costs and the profit of both firms equals zero.

Determining the manager of one firm gets to observe the output

c.

The statement of one firm observe the output of the rival firm before making its own output decision corresponds to the decision made by the follower company on the Stackelberg oligopoly model.

In this model, the leading firms make the output decision before the following firms.Hence the managers of the following firms will decide an output level normally lower than that of the leading firms.

Determining the managers perceive that rivals

d.

In the Sweezy oligopoly model, the managers of the rival firms will have the same level of output and will be able to make decisions to cut prices if the rival firm reduces them previously.However, this will not happen if a price increase occurs since the rival firm with a lower price can take advantage of to have a greater market share.