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🧃intermediate microeconomic theory review

Quantity competition

Written by the Fiveable Content Team • Last updated September 2025
Written by the Fiveable Content Team • Last updated September 2025

Definition

Quantity competition refers to a strategic interaction model where firms compete by choosing the quantity of output to produce, rather than setting prices. This type of competition often occurs in oligopolistic markets, where a few firms dominate and their production decisions directly affect market supply and prices. The nature of quantity competition can lead to different equilibrium outcomes depending on the specific model applied, such as Cournot, Bertrand, or Stackelberg, which illustrate how firms adjust their quantities based on the expected decisions of their rivals.

5 Must Know Facts For Your Next Test

  1. In quantity competition, firms aim to maximize profits by choosing output levels that consider the actions of competitors, leading to Nash equilibria.
  2. The Cournot model predicts that if firms increase production simultaneously, total market output rises, potentially driving down prices.
  3. In contrast to Cournot, the Bertrand model suggests that firms undercut each other's prices until they reach a point where profits are minimized and price equals marginal cost.
  4. Stackelberg competition introduces a first-mover advantage, allowing the leader firm to secure higher profits while influencing the follower's output decision.
  5. The outcomes of quantity competition models can differ significantly; for instance, Cournot typically results in higher prices than Bertrand due to differing strategic focuses on quantity versus price.

Review Questions

  • How does quantity competition impact pricing strategies among firms in an oligopoly?
    • In quantity competition, firms determine their output levels while anticipating how their competitors will respond. This can lead to a situation where an increase in total production lowers market prices, impacting profitability. As firms adjust their quantities based on rivals' expected behavior, they create a strategic interplay that shapes pricing dynamics; in general, higher quantities tend to drive prices down due to increased supply.
  • Compare and contrast the outcomes of Cournot and Bertrand models in terms of market prices and firm profits.
    • In Cournot competition, firms decide on quantities simultaneously, which often leads to higher market prices since firms do not fully compete on price. On the other hand, the Bertrand model results in intense price competition as firms set prices rather than quantities. This typically drives prices down to marginal costs, reducing profits significantly compared to Cournot. The key difference lies in how firms strategize: Cournot focuses on adjusting quantities with stable pricing outcomes, while Bertrand emphasizes aggressive price undercutting.
  • Evaluate how Stackelberg leadership affects market outcomes compared to simultaneous quantity competition models like Cournot.
    • Stackelberg leadership creates a distinct advantage for the leading firm by allowing it to set its output first. This decision influences the subsequent production choices of follower firms, often resulting in higher profits for the leader as it anticipates rival responses effectively. In contrast to simultaneous decision-making in models like Cournot, where firms react without knowing rivals' choices, Stackelberg dynamics produce asymmetric information outcomes, generally leading to different equilibrium outputs and market power distributions among competing firms.