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and approaches 24 thousand as the number of firms becomes large (say, 19 or

more). In turn, the equilibrium market price approaches 30  24 6; that is,

price steadily declines and approaches average cost.It can be shown that this result

is very general. (It holds for any symmetric equilibrium, not only in the case of

linear demand.) The general result is as follows:

As the number of firms increases, the quantity equilibrium played by identical oli-

gopolists approaches the purely competitive (zero-profit) outcome.

In short, quantity equilibrium has the attractive feature of being able to account

for prices ranging from pure monopoly (n 1) to pure competition (n very

large), with intermediate oligopoly cases in between.

PRICE COMPETITION

In this section, we consider two basic models of price competition. The first is

a model of stable prices based on kinked demand. The second is a model of

price wars based on the paradigm of the prisoner’s dilemma.

Price Rigidity and Kinked Demand

Competition within an oligopoly is complicated by the fact that each firm’s

actions (with respect to output, pricing, advertising, and so on) affect the prof-

itability of its rivals. Thus, actions by one or more firms typically will trigger

competitive reactions by others; indeed, these actions may trigger “second-

round” actions by the original firms. Where does this jockeying for competitive

position settle down? (Or does it settle down?) We begin our discussion of pric-

ing behavior by focusing on a model of stableprices and output. Many oligop-

olies—steel, automobiles, and cigarettes, to name a few—have enjoyed

relatively stable prices over extended periods of time. (Of course, prices adjust

over time to reflect general inflation.) Even when a firm’s cost or demand fluc-

tuates, it may be reluctant to change prices.

Price rigidity can be explained by the existence of kinked demand curvesfor

competing firms. Consider a typical oligopolist that currently is charging price

P*. Why might there be a kink in its estimated demand curve, as in Figure 9.3?

Suppose the firm lowers its price. If price competition among firms is fierce, such

a price cut is likely to be matched by rival firms staunchly defending their market

shares. The upshot is that the firm’s price reduction will generate only a small

increase in its sales. (The firm will not succeed in gaining market share from its

rivals, although it could garner a portion of the increase in industry sales owing

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