Economics Oligopoly Questions Long
In oligopoly, which is a market structure characterized by a small number of large firms, two common models used to analyze the behavior of firms are the dominant firm model and the duopoly model. While both models focus on the behavior of firms in an oligopolistic market, there are key differences between them.
1. Definition:
- Dominant Firm Model: In this model, there is one dominant firm that has a significant market share and sets the price for the entire industry. Other smaller firms, known as fringe firms, act as price takers and adjust their output levels accordingly.
- Duopoly Model: In this model, there are only two firms operating in the market. These two firms interact strategically, considering each other's actions and decisions when determining their own output levels and prices.
2. Market Power:
- Dominant Firm Model: The dominant firm possesses substantial market power due to its large market share. It can influence the market price by adjusting its output level, and the fringe firms have no impact on the market price.
- Duopoly Model: In a duopoly, both firms have some market power, but neither has complete control over the market. Each firm's actions can affect the market price, and they must consider the potential reactions of their competitor when making decisions.
3. Price Determination:
- Dominant Firm Model: The dominant firm sets the price for the entire industry based on its own production decisions. The fringe firms adjust their output levels to accommodate the price set by the dominant firm.
- Duopoly Model: In a duopoly, both firms independently determine their output levels and prices. They consider the potential reactions of their competitor when deciding on their own strategies. This strategic interaction can lead to various outcomes, such as collusion or competitive behavior.
4. Competition:
- Dominant Firm Model: The dominant firm faces little to no competition from the fringe firms. It can act as a price setter and exercise market power.
- Duopoly Model: The two firms in a duopoly directly compete with each other. Their actions and decisions are interdependent, and they must consider the potential reactions of their competitor. This competition can lead to various outcomes, such as price wars or tacit collusion.
5. Market Structure:
- Dominant Firm Model: The dominant firm model assumes a market structure where one firm has a significant market share, and the remaining firms are relatively small and have no impact on the market price.
- Duopoly Model: The duopoly model assumes a market structure with only two firms operating in the market. These two firms have a significant influence on the market price and compete directly with each other.
In summary, the dominant firm model focuses on a market structure where one firm has a dominant position and sets the price, while the duopoly model analyzes the strategic interaction between two firms in a market. The dominant firm model emphasizes the market power of the dominant firm, while the duopoly model highlights the competition and interdependence between the two firms.