Question

Two large diversified consumer products firms (Firm A and Firm B) are about to enter the market for a new pain reliever. The two firms are very similar in terms of their costs, strategic approach, and market outlook. The market demand curve for the pain reliever is given as:

P = 2 – 0.000625Q where Q = Q_A + Q_B

Both firms have the same constant marginal costs of production MCA = MCB = $0.50 per bottle; and fixed costs of production FCA = FCB = $50. Patent protection ensures that the two firms will operate as a duopoly for the foreseeable future. Quantities are expressed in bottles and price in $ per bottle.

If the firms act as Cournot duopolists, solve for the individual firms’ outputs, the market output and price, and the individual firms’ profits.

If Firm A could spend an unrecoverable expenditure of $70 in an advertising campaign, it would capture a greater share of the market and become the Stackelberg leader. Solve for the individual firms’ outputs, the market output and price, and the individual firms’ profits. Should Firm A go for the advertising campaign? As leader, Firm A knows what Firm B’s best-response or profit-maximising quantity and must take this into account when maximising its own profit.

Collusion is a common feature of oligopolistic markets. Briefly discuss the key factors that influence the success or otherwise of attempts by firms to collude.

Answer 1

In Oligopolistic Market, Collusion exists more than in any other market structure. The point is that oligopoly provides a platform for inter dependency where collusion is a hindrance of lowering the cost of competition. Due to interdependency different firms have to employ defensive marketing techniques to gain profits. Hence firms incur a lot of costs in marketing and promotional activities. So in Oligopoly, selling costs and advertising plays a very crucial role.

The base of Oligopoly lies in group behaviour. If a participant in oligoOlig market assumes for a profit maximization then he's going against the market conditions. So the other menmemb in the market may protest and change their price too . In the market structures other than Oligopolistic, the demand curve faced by a firm is determinate. But for the oligopoly, it is very difficult to draw the demand curve as for the reason of interdependency. If here Firm A goes for an advertising campaign, it is inducing his own cost to gain profit. Other firm in the industry will obviously resist it's defensive activities.