Cournot’s duopoly model
Sweezy’s kinked demand curve model
Price leadership models
Collusive models :The Cartel Arrangement
The Game Theory
Antoine Augustin Cournot was a French
philosopher and mathematician. Antoine
Augustin Cournot was born at Gray
In 1838 the book Researches on the
Mathematical Principles of the Theory of
Wealth was published, in which he used the
application of the formulas and symbols of
mathematics in economic analysis
There are two firms each owning an artesian mineral
Both the firms operate their wells at zero marginal cost
Both of them face a demand curve with constant
Each seller acts on the assumption that his competitor
will not react to his decision to change his output and
Wrong calculation about competitor’s behavior
Zero cost of production
"Kinked" demand curves and traditional demand
curves are similar in that they are both downwardsloping. They are distinguished by a hypothesized
concave bend with a discontinuity at the bend - the
"kink." Therefore, the first derivative at that 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 idea can be envisioned
graphically by the intersection of an upward-sloping marginal
cost curve and a downward-sloping marginal revenue curve
(because the more one sells, the lower the price must be, so the
less a producer earns per unit). In classical theory, any change in
the marginal cost structure (how much it costs to make each
additional unit) or the marginal revenue structure (how much
people will pay for each additional unit) will be immediately
reflected in a new price and/or quantity sold of the item. This
result does not occur if a "kink" exists. Because of this jump
discontinuity in the marginal revenue curve, marginal costs
could change without necessarily changing the price or quantity.
the kinked demand analysis only suggests why prices
Only explain the stability of output and price
Price stability does not stand the test of empirical
The firms in the oligopolistic market are not happy with
price competition among themselves. They try various
methods to maximize joint profits. Price leadership is one
of the means which provides relief to the firms from the
strains of price competition.
The firms in the oligopolistic industry (without any formal
agreement) accept the price set by the leading firm in the
industry and move their prices in line with the prices of the
leader firm. The acceptance of price set by the price leader
firm maximizes the total profits of each firm in the
The main assumptions of price leadership model under oligopoly are as under.
(1) There are two firms A and B in the market.
(2) The output produced by the two firms is homogeneous.
(3) The firm A being the low cost firm or a dominant firm acts as a leader firm.
(4) Both of the firms face the same demand curve
(5) Each of the two firms has an equal share in the market. The price and
output determination under price leadership
A. Price leadership by low-Cost firm
B. Price leadership By a Dominate Firm
C. The Barometric leadership
Problem in pricing and output
Acceptance of small firms
A cartel is a formal (explicit) "agreement" among
competing firms. It is a formal organization of
producers and manufacturers that agree to fix
prices, marketing, and production.
Cartels usually occur in an oligopolistic
industry, where the number of sellers is small (usually
because barriers to entry, most notably startup
costs, are high) and the products being traded are
The number of firms: As the number of firms in an
industry increases, it is more difficult to successfully
Cost and demand differences between firms.
Economic recession: An increase in average total cost
or a decrease in revenue
The classical models of strategic action and reaction
The cartel system of price and output determination.
Game theory – a mathematical technique to show oligopoly
firms play their games/
The nature of the problem
Two person A and B – match fixing- arrested by CBI.
If both confess they ill get 5yr imprisoned
If both denies will be free
If one confesses & turn approver get 2yr and other gets 10 yr