In which of the following market structures with 2 identical firms do both firms produce more than the Cournot outcome.Group of answer choicesStackelberg Oligopoly.Cartel.Perfect Competition.None of the above.
Question
In which of the following market structures with 2 identical firms do both firms produce more than the Cournot outcome.Group of answer choicesStackelberg Oligopoly.Cartel.Perfect Competition.None of the above.
Solution
The correct answer is Perfect Competition.
In a Perfect Competition market structure, firms are price takers and they produce at a level where Price equals Marginal Cost (P=MC) to maximize their profits. This results in a higher output compared to the Cournot outcome where firms decide their output simultaneously and independently to maximize their own profits, considering the decisions of the other firms.
In a Stackelberg Oligopoly, one firm acts as a leader and the other as a follower. The leader firm decides its output first, and the follower firm adjusts its output based on the leader's decision. This results in a lower combined output compared to the Cournot outcome.
In a Cartel, firms collude to act like a monopoly and reduce their combined output to increase the market price and their profits. This results in a lower combined output compared to the Cournot outcome.
Therefore, among the given options, only in Perfect Competition do both firms produce more than the Cournot outcome.
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