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Home Price and Output Determination Under Monopolistic Competition Pricing and Output Determination Under Duopoly

 

Pricing and Output Determination Under Duopoly:

 

Definition and Explanation:

 

If an industry is composed of only two giant firms, each selling identical products and having half of the total market, there is every likelihood of collusion between the two firms. The firms may agree on a price, or divide the market, or assign quota, or merge themselves into one unit and form a monopoly or try to differentiate their products or accept the price fixed by the leader firm, etc., etc.

 

In case the duopolists producing perfect substitute engage in price competition, the firm having lower costs, better goodwill and clientele will drive the rival firm out of the market and then establish a monopoly.

 

If the products of the duopolists are differentiate, each firm will have a close watch on the actions of its rival firms. The firms manufacturing good quality products with lesser cost will earn abnormal profits. Each firm will fix the price of the commodity and expand output in accordance with the demand of the commodity in the market.

 

Duopoly Models:

 

There are four main duopoly models which explain the price and quantity determinations in duopoly. These models are:

 

(i) Classical Model of Cournot and Edge Worth.

 

(ii) Hotellings Spatial Equilibrium Model.

 

(iii) Stackelberg's Model.

 

(iv) Modern Game Theory Model.

 

A very brief explanation of these is given below:

 

(i) Cournot and Edgeworth Model:

 

Cournot approach is based, on the assumptions that rivals output remains the same and one duopolists plans to change in his output. Edgeworth model assumes that rival's price of the good to remain unchanged as one duopolists plans a change in his price of the good.

 

(ii) Stackberg's Approach:

 

It is based on the assumptions that one of the duopolists is a 'Leader' and the other is the follower.

 

(iii) Hotelling Spatial Equilibrium Model:

 

In this model, the products of the duopolists are differentiate in the eyes of the buyers by virtue of the location of the duopolists.

 

(iv) Game Theory Approach:

 

Whenever there are two or a few firms competing in an industry for profit, each firm can and dose react to the price, quantity, quality and product changes which other firm undertakes. The duopolists or oligopoly have a reaction function. As firms under duopoly are independent, they, therefore, employ strategies. The competing firm also make plans to contract and makes decisions about output and price of the good keeping in view the strategy of its rivals. The plans made by these firm, are known as game strategies. The game theory model describes the firms, interaction model. It is the analytical framework in which two or more firms compete for economics profits that depend on the strategy that the others employ.

 

All games theory models have at least three common elements:

 

(a) Players: Players in the game theory are the firms.

 

(b) Strategies: Strategies are the plans, the possible choices of the firms for production of output, prices of goods, changes in the quality of the product

.

(c) Pay offs (economic profit): These are the profits or losses realized by the firm.

 

Relevant Articles:

 

Historical Background of Monopolistic Competition
What is Monopolistic/Imperfect Competition
Characteristics of Monopolistic/Imperfect Competition
Short Run Equilibrium Under Monopolistic/Imperfect Competition
Equilibrium Price and Output in the Long Run Under Monopolistic/Imperfect Competition
Wastes of Monopolistic/Imperfect Competition

Price and Output Determination Under Oligopoly

Pricing and Output Determination Under Duopoly
Three Important Models of Oligopoly
 

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Rent
Wages
Interest
Profits
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance

History of Money
 

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