ABSTRACT
Just as economists make sense of what happens in competitive markets in terms of the market equilibrium that arises from the interaction of demand and supply, in an oligopolistic equilibrium, the behavior of firms corresponds to that of a Nash equilibrium (NE), that is, each firm is maximizing its profit given the actions of the others. Oligopolies are usually modeled in one of two ways: firms either choose the quantities they wish to produce, or they choose the prices they wish to charge. If firms are capacity-constrained, then pricing at marginal cost is no longer an NE. The following conclusion is generally valid. When players’ choice variables are strategic substitutes, then there is a first-mover advantage in the leader-follower game. Since the sellers are symmetric, in equilibrium the prices charged by each must be the same. So an alternative way to solve for the NE is to impose symmetry.
