Compare and Contrast the equilibria of Quantity-Setting and Price-Setting Oligopolists
Oligopoly markets are where there are a few large firms in the market and the firms are large
relative to the market hence they respond strategically to each other. Oligopoly markets tend
to have a market structure with a few large firms in the market, high barriers to entry and
products can be differentiated or undifferentiated. Quantity setting oligopolists are firms who
decide how much output to produce as the strategic variable to compete with rival
oligopolists. In contrast, Price setting oligopolists decide what price to sell products at as the
strategic variable to compete with rivals. The equilibrium for quantity-setting oligopolists is
where a firm will not want to change its output produced given the output produced by its
rivals. However, the equilibrium for price-setting oligopolists is where an oligopolist will not
want to change the price it charges given the price charged by the other rival oligopolists.
As part of the assumptions for oligopoly we assume that buyers are price takers which
means that each buyer takes the price given and believes they can buy as much as they
want that price without influencing it. This implies that there are many buyers as if there were
only a few buyers then consumption of each buyer would likely be able to influence the
market price. We also assume that both buyers and sellers have complete information
regarding prices, and this means that both buyers and sellers are fully informed and respond
to each of their private incentives in order to maximise utility in case of the buyer and profits
in the case of the seller. The final two general oligopoly assumptions are that sellers are
price makers and that entry into the market is blocked in the long run. Sellers being price
makers mean the seller can influence the price at which it sells output. As a result, the seller
will sell more units if it chooses to charge a lower price and this results in a negatively sloped
demand curve for oligopolistic firms. Furthermore, with an oligopoly market as the seller is a
price maker and there are only a few large firms in the market any change in choice of
output or price is going to trigger a reaction in rival oligopolists in terms of how they price
their products or the amount of output they choose to produce. Entry into the market being
blocked even in the long run results in the long run and short run equilibria of a quantity-
setting oligopolist to be the same. This also holds true for price-setting oligopolists.
Both models of oligopoly are similar in that both models assume there are two duopolists in
the market (Firms A and B for example) in order to simplify the analysis and hence in figures
1 and 2 we can draw diagrams using just the output and pricing of two firms with one firm’s
output/price being on each axis. Both models also assume that firms make decisions on their
strategic variable simultaneously hence the Nash equilibrium game theory concept can be
used to solve for the equilibrium for both the Cournot and Bertrand oligopoly models.
However, while the Cournot model assumes firms decide the level of output they produce,
Oligopoly markets are where there are a few large firms in the market and the firms are large
relative to the market hence they respond strategically to each other. Oligopoly markets tend
to have a market structure with a few large firms in the market, high barriers to entry and
products can be differentiated or undifferentiated. Quantity setting oligopolists are firms who
decide how much output to produce as the strategic variable to compete with rival
oligopolists. In contrast, Price setting oligopolists decide what price to sell products at as the
strategic variable to compete with rivals. The equilibrium for quantity-setting oligopolists is
where a firm will not want to change its output produced given the output produced by its
rivals. However, the equilibrium for price-setting oligopolists is where an oligopolist will not
want to change the price it charges given the price charged by the other rival oligopolists.
As part of the assumptions for oligopoly we assume that buyers are price takers which
means that each buyer takes the price given and believes they can buy as much as they
want that price without influencing it. This implies that there are many buyers as if there were
only a few buyers then consumption of each buyer would likely be able to influence the
market price. We also assume that both buyers and sellers have complete information
regarding prices, and this means that both buyers and sellers are fully informed and respond
to each of their private incentives in order to maximise utility in case of the buyer and profits
in the case of the seller. The final two general oligopoly assumptions are that sellers are
price makers and that entry into the market is blocked in the long run. Sellers being price
makers mean the seller can influence the price at which it sells output. As a result, the seller
will sell more units if it chooses to charge a lower price and this results in a negatively sloped
demand curve for oligopolistic firms. Furthermore, with an oligopoly market as the seller is a
price maker and there are only a few large firms in the market any change in choice of
output or price is going to trigger a reaction in rival oligopolists in terms of how they price
their products or the amount of output they choose to produce. Entry into the market being
blocked even in the long run results in the long run and short run equilibria of a quantity-
setting oligopolist to be the same. This also holds true for price-setting oligopolists.
Both models of oligopoly are similar in that both models assume there are two duopolists in
the market (Firms A and B for example) in order to simplify the analysis and hence in figures
1 and 2 we can draw diagrams using just the output and pricing of two firms with one firm’s
output/price being on each axis. Both models also assume that firms make decisions on their
strategic variable simultaneously hence the Nash equilibrium game theory concept can be
used to solve for the equilibrium for both the Cournot and Bertrand oligopoly models.
However, while the Cournot model assumes firms decide the level of output they produce,
