Question

with the help of diagrams, what happens if duopolistic companies such as airline industry (company A, company B) become a monopolistic company since one of the company collapses (A collapses) ? what would be the new price and outputs strategy for company B? and what would be the consequences on the overall economic welfare in this market?

Answer 1

A classic duopoly can be of two types, Cournot(where they compete over quantities) and Bertrand( where they compete over price)

In the cournot case, the oilgopolistic outcome lies between competitive and monopolistic outcome, and in price competition, the equilibrium output coincides with competitive market outcome.

If one firm exits, and duopoly becomes a monopoly,

the equilibrium price will rise as there will be no price war or rigidity, due to lack of competition, and the monopolist will be able to sell at a higher price

the equilibrium quantity will fall as a consequence of law of demand operating with rise in price

Overall Economic welfare of the market will fall, as exit of one firm will reduce the producer surplus and rise in price will reduce the consumer surplus, thus their will be a deadweight loss which will result in fall in social welfare of the market.

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