ABSTRACT
This chapter analyzes markets with a few competing firms—oligopolies—where strategic interaction shapes prices and quantities. We begin with homogeneous product markets, introducing Cournot quantity competition and Bertrand price competition. Cournot firms choose output simultaneously, with the Cournot-Nash equilibrium capturing mutual best responses. Bertrand competition, in contrast, shows how aggressive price setting can drive prices down to marginal cost. We extend the analysis to Stackelberg competition (sequential moves), asymmetric costs, and varying firm numbers. Next, we explore differentiated product markets where firms compete in prices (Bertrand with differentiation), leading to positive markups and richer pricing strategies. Applications include multi-product pricing, cannibalization, and empirical studies using discrete choice demand estimation. Real-world examples—from bottled water to cereal and sunglasses—illustrate how product characteristics, brand portfolios, and market structure affect pricing, welfare, and competition policy.
