Question

The oligopoly model in which the businessman assumes that his competitor's output is fixed and he decides how much to produce is
1. Cournot model
2. Chamberlin model
3. Bertrand model
4. Stackelberg model

Answer 1

Correct Answer - Option 1 : Cournot model

The oligopoly model in which the businessman assumes that his competitor's output is fixed and he decides how much to produce is Cournot model.

Cournot Model:

• The Cournot model of oligopoly assumes that rival firms produce a homogenous product, and each attempts to maximize profits by choosing how much to produce.
• All firms choose output (quantity) simultaneously. The basic Cournot assumption is that each firm chooses its quantity, taking as given the quantity of its rivals.
• The Cournot model provides results which are of some importance to industrial economics.
• First of all, it can be shown that price will not in most cases equal marginal costs (see costs) and Pareto efficiency is not achieved.
• Pareto efficiency is when an economy has its resources and goods allocated to the maximum level of efficiency, and no change can be made without making someone worse off.
• Moreover, the degree to which each firm’s price exceeds marginal cost is directly proportional to the firm’s market share and inversely proportional to the market elasticity of demand.

1. Chamberlin Model:
   • The Chamberlin´s model analyses and explains the short and long run equilibriums that occur under monopolistic competition, a market structure consisting of multiple producers acting as monopolists even though the market as a whole resembles a perfectly competitive one.
2. Bertrand Model:
   • Bertrand competition is a model of competition in which two or more firms produce a homogenous good and compete in prices. Theoretically, this competition in prices, providing the goods are perfect substitutes, ends with the firms selling their goods at marginal costs and thus making zero profits.
3. Stackelberg Model:
   • The Stackelberg leadership model is a strategic game in economics in which the leader firm moves first and then the follower firms move sequentially.
   • It is named after the German economist Heinrich Freiherr von Stackelberg who published Market Structure and Equilibrium in 1934 which described the model.​