How does the duopoly outcome compare to a) perfect competition and b) monopoly?
a. For PC, P = ATC, so P* = $6. Market demand is P = 30 – Q, which is also: Q = 30 – P. So for P* = $6, Q* = 24. Compared to duopoly, the PC outcome results in a lower Price ($6 vs. $14) and a higher output (24 vs. 16 total). b. For monopoly: P = 30 – Q TR = 30Q – Q2 MR = 30 – 2Q Setting MR (for total industry output) = MC 30 – 2Q = $6 Q* = 12 P* = $18 Compared to duopoly, monopolist would charge a higher price ($18 vs. $14) by restricting output to 12 (vs. 16). Therefore, the duopoly outcome lies (P = $14, Q = 16) between the PC outcome (P = $6, Q= 24) and monopoly outcome (P = $18, Q = 12) . It can also be shown that as the number of competitive firms increases, from 2 firms to an infinite number of firms, that each firm’s equilibrium output decreases, total industry output approaches the PC outcome (Q=24), the equilibrium market price approaches the PC outcome (P = $6), and economic profits approach 0. See p. 401. PRICE COMPETITION 1. Price Rigidity and Kinked Demand – Under oligopo
