Basic Oligopoly Models

Four types of oligopolies:

• Sweezy oligopoly: An industry in which there are few firms serving many customers; (2) firms produce differentiated products; (3) each firm believes rivals will respond to a price reduction but will not follow a price increase; and (4) barriers to entry exist. It may be optimal to continue to produce the same level of output even if marginal cost declines.


• Cournot oligopoly: An industry in which (1) there are few firms serving many consumers; (2) firms produce either differentiated or homogenous products; (3) each firm believes rivals will hold their output constant if it changes its output; and (4) barriers to entry exist. It is optimal to expand output if marginal cost declines.


• Stackelberg oligopoly: An industry in which (1) there are few firms serving many consumers; (2) firms produce either differentiated or homogeneous products; (3) a single firm (the leader) chooses an output before rivals select their outputs; (4) all other firms (the followers) take the leader's output as given and select outputs that maximize profits given the leader's output; and (5) barriers to entry exist.


• Bertrand oligopoly: An industry in which (1) there are few firms serving many consumers; (2) firms produce identical products at a constant marginal cost; (3) firms compete in price and react optimally to competitors' prices; (4) consumers have perfect competition and there are no transaction costs; and (5) barriers to entry exist.

You can read more about these four types of oligopolies in chapter 9 of Michael Baye’s Managerial Economics and Business Strategy.