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In this essay I am going to discuss models of oligopoly behaviour and analyse them and see whether they are realistic or not and evaluate them with certain examples where they may be most suitable An oligopoly is a market which consists of few firms which sell similar or homogenous products In this essay I will also be looking at a duopoly which is a market with two firms The Cournot equilibrium this is where a pair of output levels one for each firm which are such that after they are chosen neither firm has an incentive to change its output level1 To easily understand the Cournot equilibrium let us consider a duopoly a market consisting of two firms In most markets the market price is where supply is equal to demand Therefore the price firm 1 sets itself is dependant on the quantity supplied of firm 2 When firm 1 chooses the supply quantity it assumes that the current quantity firm 2 supplies are fixed Costs can be thought of a function of its own quantity supplied because costs of firm 1 are independent of whatever firm 2 supplies In this market specifically firm 1s reactions depend on the action of firm 2 A reaction function is used to show the optimum level of if the other firm changes their supply level Assuming that each firm profit maximises therefore the profit functions are 9281 A-bq1q2 q1 - Cq19282 A-bq1q2 q2 - Cq2 Firm 2 decides to supply 200 units on the market therefore firm 1s profit is dependant on its own supply to the market 9281 A-bq1200 q1 - Cq1 It will then produce where marginal cost is equal to marginal revenue to profit maximise Suppose firm 2 increases the quantity supplied to 400 units this will lower the price for firm 1 therefore decreasing its marginal revenue and profits This will shift
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