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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.
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.
The firms are economically rational and act strategically, usually seeking to maximize profit given their competitors' decisions. An essential assumption of this model is the "not conjecture" that each firm aims to maximize profits, based on the expectation that its own output decision will not have an effect on the decisions of its rivals.
Martin Shubik developed the Bertrand–Edgeworth model to allow for the firm to be willing to supply only up to its profit maximizing output at the price which it set (under profit maximization this occurs when marginal cost equals price). [2] He considered the case of strictly convex costs, where marginal cost is increasing in output.
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 idea can be envisioned graphically by the intersection of an upward-sloping marginal cost curve and a downward-sloping marginal revenue curve ...
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 ...
Firms have partial control over the price as they are not price takers (due to differentiated products) or Price Makers (as there are many buyers and sellers). [5] Oligopoly refers to a market structure where only a small number of firms operate together control the majority of the market share. Firms are neither price takers or makers.