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Joseph Louis François Bertrand (1822–1900) developed the model of Bertrand competition in oligopoly. This approach was based on the assumption that there are at least two firms producing a homogenous product with constant marginal cost (this could be constant at some positive value, or with zero marginal cost as in Cournot).
Profit maximization using the total revenue and total cost curves of a perfect competitor. To obtain the profit maximizing output quantity, we start by recognizing that profit is equal to total revenue minus total cost (). Given a table of costs and revenues at each quantity, we can either compute equations or plot the data directly on a graph.
If the firms are colluding in the oligopoly, they can set the price at a high profit-maximising level. Perfect and imperfect knowledge: Oligopolies have perfect knowledge of their own cost and demand functions, but their inter-firm information may be incomplete. If firms in an oligopoly collude, information between firms then may become perfect.
A monopolist can set a price in excess of costs, making an economic profit. The above diagram shows a monopolist (only one firm in the market) that obtains a (monopoly) economic profit. An oligopoly usually has economic profit also, but operates in a market with more than just one firm (they must share available demand at the market price).
p 1 = firm 1's price level pr unit; p 2 = firm 2's price level pr unit; b 1 = slope coefficient for how much firm 2's price affects firm 1's demand; b 2 = slope coefficient for how much firm 1's price affects firm 2's demand; q 1 =A 1-a 1 *p 1 +b 1 *p 2; q 2 =A 2-a 2 *p 2 +b 2 *p 1; The above figure presents the best response functions of the ...
The Edgeworth model shows that the oligopoly price fluctuates between the perfect competition market and the perfect monopoly, and there is no stable equilibrium. [6] Unlike the Bertrand paradox, the situation of both companies charging zero-profit prices is not an equilibrium, since either company can raise its price and generate profits.
Therefore, the first derivative point is undefined and leads to a jump discontinuity in the marginal revenue curve. Classical economic theory assumes that a profit-maximizing producer with some market power (either due to oligopoly or monopolistic competition ) will set marginal costs equal to marginal revenue .
This diagram shows an example corner solution where the optimal bundle lies on the x-intercept at point (M,0). IC 1 is not a solution as it does not fully utilise the entire budget, IC 3 is unachievable as it exceeds the total amount of the budget. The optimal solution in this example is M units of good X and 0 units of good Y.