Chapter 6: Oligopoly Dynamics
* Michael Kopel 6.1 Introduction A market structure in which there are relatively few firms, each of which is large relative to the total industry, is referred to as oligopoly. In contrast to the extreme cases of a monopolistic market and a perfectly competitive market, in an oligopoly the interconnections of one particular firm with the rival firms play a central role and must not be neglected. A firm operating in such a market is certainly the most difficult to manage, since the optimal action depends on the actions of the other firms, and the strategic interactions among the firms have to be taken into account when the optimal decision is determined. Oligopoly theory usually studies the behavior (or conduct) and the performance of firms in a partial equilibrium framework. It is due to the complexity of oligopoly that no single model exists that can describe all the phenomena observed in real-world markets. The literature on oligopoly has rapidly increased over the last 25 years, and most of the models in the field of industrial organization can be linked to one of the names of Cournot, Bertrand or von Stackelberg (for more exhaustive historical accounts of early work in oligopoly theory the reader is referred to Shapiro, 1989 and Puu and Sushko, 2002). Antoine Augustin Cournot is often considered as the founder of oligopoly theory. In his book, Cournot studies a simple linear oligopoly model in which firms select quantities and he derives production levels, prices, and profits of the firms...
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