2
$\begingroup$

In microeconomic models of oligopolies we consider price competition and quantity competition (think Cournot, Bertrand, Stackelberg). I can easily imagine price competition where a producer sets the price for the product and then consumers choose how much to buy. But I cannot so easily imagine quantity competition. Usually, when I walk into a store I see prices that are fixed, not quantities. (This holds more generally than just for oligopolies, though.)

What could be some realistic examples of quantity competition where the producers set the quantities rather than the price?

Improve this question
$\endgroup$
1
  • $\begingroup$ OPEC as suggested by 1muflon1 is a nice example. Are there are other examples? $\endgroup$
    – Richard Hardy
    Commented Mar 13, 2022 at 11:01

1 Answer 1

Reset to default
2
$\begingroup$

You can't differentiate empirically between Bertrand and Cournot oligopoly/duopoly just by looking whether quantity or price varies.

In both Cournot and Bertrand model price can change. The difference is that in Bertrand model causality goes from price to quantity and in Cournot model from quantity to price but that can be hard to disentangle just by eyeballing it.

A textbook example of real-world Cournot oligopoly are OPEC countries (see Mankiw Principles of Economics 8th ed pp 345). OPEC is excellent example because OPEC countries cannot directly "set" world market price of oil (at least not in a sense that grocery can put price tags on its goods). Instead

OPEC tries to set production levels for each of the member countries. The problem that OPEC faces is much the same as problem that Jack and Jill face in our story [referring to previous example of Cournot model].

Even outside textbooks OPEC is typically modeled using quantity competition models (e.g. see Lawell 2020).

However, you should note that in equilibrium where there would be no perturbations (no new oil discovered, no change in preference etc) oil prices would appear to be fixed. Conversely, the retail prices change even if not a often as commodity prices.

By the same token OPEC quantity produced varies over time. Companies/countries have to always respond to new perturbations to factors that form supply and demand (e.g. costs of production, preferences etc).

You shouldn't just assume that because prices tend to be less volatile market is competing on prices instead of quantity.

Improve this answer
$\endgroup$
3
  • $\begingroup$ It is not that I would observe varying prices and be tempted to conclude there is price competition. Rather, I am hardly ever offered to buy a fixed quantity for a price of my choice; instead, I am offered to buy a quantity of choice for a fixed price. This is what I face basically every time I want to buy anything. Also, an OPEC country presumably does not go out to the market and say: here is 1 million barrels of oil. Treat yourself for whatever price you are willing to pay! Rather, it says: I am selling oil for $100 a barrel. Who wants some? (OK, perhaps it is not that simple...) $\endgroup$
    – Richard Hardy
    Commented Mar 11, 2022 at 14:48
  • $\begingroup$ @RichardHardy on oil market you will be also asked to pay fixed spot price for barrels of oil you are buying. The market simply responds with lag, if you would buy trillions of chocolate bars at TESCO price would eventually budge $\endgroup$
    – 1muflon1 ♦
    Commented Mar 11, 2022 at 14:49
  • 1
    $\begingroup$ After some more thought, I get that your example makes sense. Thank you! I will keep the answer unaccepted for a while as I would like to get more examples from other users. $\endgroup$
    – Richard Hardy
    Commented Mar 13, 2022 at 11:00

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.