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Unit 13: Oligopoly

11. The demand curve of an oligopolist is indeterminate. Notes

12. Under Hall and Hitch version the demand curve has a kink at the price which is above full
cost price.

13. Oligopoly firm may form cartel.

14. Price leadership is, where fi rms jointly fix a price and output through agreement.
15. Bertrand’s duopoly model assumes that each seller assumes his rival’s price, instead of his
output, to remain constant.

13.8 Review Questions

1. In what form does rivalry occur in an oligopoly? Why does competition among rivals occur
most often in oliogopolies?
2. Go through the figure below and answer the questions that follow:

F G H J Quantity (Q)

(a) Which point determines the equilibrium output in the fi gure above?
(b) Which point determines the equilibrium price in the fi gure above?
3. Why is there so much advertising in oligopoly? How does such advertising help consumers

and promote efficiency? Why might it be expensive at times?

4. There is an oligopoly consisting of 4 firms. Assume that the marginal cost of production is
` 10 per unit of the good. Demand at price X is given as:
P Q
60 0
50 100
40 200
30 300
20 400

10 500
0 600
What are the price and output levels in an oligopoly Nash Equilibrium?
5. Two firms compete in the market for a homogeneous good. Total demand equals

D(p) = 37 – p. They produce the good at a constant marginal cost of 5 (that is, the cost
functions are C (q) = C (q) = 5q). The state obliges fi rms to set price equal to p = 17. (So total
1
2

demand will be 20 units.) The firms compete in advertising in order to attract costumers.

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