Managerial Economics &
Business Strategy
Chapter 9
Basic Oligopoly Models
Work through demonstration
problem 9-4 (put away your books)
• Suppose the inverse demand function for two
Cournot duopolists is given by P=10-(Q1+Q2) and
their costs are zero
• What is each firm’s MR?
• What are the reaction functions for the two firms
• What are the Cournot equilibrium outputs?
• What is the equilibrium price?
Isoprofit Curve
• Along each curve profit is the same
• Curves closer to the “monopoly output” are
associated with higher profits

Monopoly outputs are at intersection of reaction function and
axis (X for firm 1 and Y for firm 2)
• Reaches peak at intersection of reaction function
• Do not intersect each other
Firm 1’s Isoprofit Curve
Q2
r1
B
C
A
D
1 = $100
Increasing
Profits for
Firm 1
1 = $200
Q1M
Q1
Another Look at Cournot
Decisions
Q2
r1
Firm 1’s best response to Q2*
Q2*
 1 = $100
 1 = $200
Q1 *
Q1M
Q1
What about firm 2??
• Isoprofit curves are the mirror image of firm 1’s
isoprofit curves
Another Look at Cournot
Equilibrium
Q2
r1
Firm 2’s Profits
Cournot Equilibrium
Q2M
Q2*
Firm 1’s Profits
r2
Q1*
Q1M
Q1
Impact of Rising Costs on the
Cournot Equilibrium
Q2
r1*
Cournot equilibrium after
firm 1’s marginal cost increase
r1**
Q2**
Cournot equilibrium prior to
firm 1’s marginal cost increase
Q2*
r2
Q1**
Q1 *
Q1
Stackelberg Model
• Cournot assumed that firms were mirror
images of each other  Stackelberg doesn’t
• Firms produce differentiated or homogeneous
products.
• Barriers to entry.
• Firm one is the leader.

The leader commits to an output before all other firms.
• Remaining firms are followers.

They choose their outputs so as to maximize profits,
given the leader’s output.
• Behaves like a cournot oligopolist
What does it look like
mathematically?
What happens?
• Knows follower will choose a point on their own
reaction function


Leader chooses output on the follower’s reaction function that
corresponds to their highest profits
Corresponds to the TANGENCY of the leader’s isoprofit curve
to the followers reaction function