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Monopolistic Price Competition

short-run vs long-run  

  • few firms in the beginning >> economic profits
  • more firms enter in long run >> price = marginal cost
    • each firm's output/price decreases
    • overall industry output increases

Cournot equilibrium - firms make decision all at the same time  

  • found at the intersection of the 2 firm's reaction curves
    • gives respective quantities produced by the 2 firms (in duopoly case)
  • identical firms (identical cost functions) >> same output from each firm
    • q1 = q2
    • plug into reaction functions to find how much each firm produces

Bertrand model - prices decided by firms simultaneously  

  • assume the good to be homogeneous
  • follows rules of competitive equilibrium
    • P = MC
  • homogeneous good >> consumer only cares about price
    • firm charges too much >> can't sell anything
    • will assume that other firms behave the same way >> act as if in a competitive equilibrium
Subject: 
Economics
Subject X2: 
Economics

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