How do price competition, leadership, and cartels differ in strategic variables?
Bertrand tests undercutting, a leader faces residual demand, and a cartel allocates joint output like multiple plants.
Follow the cause and effect
Identify product differentiation and whether firms choose P or Q.
For price leadership, build residual demand=market demand−fringe supply.
For a cartel, set joint MR=MCi and inspect each firm’s deviation.
The model you are using
Conditions for this model
The leader example has P≥20 and MCleader=20. Bertrand uses its own separately stated assumptions.
The exam trap
The Bertrand P=MC result needs homogeneous goods, similar costs, and no binding capacity constraints.
Connect the reasoning to the graph
What changes
- A price leader graph uses residual demand after fringe supply; a cartel uses market demand and total output.
What stays fixed
The leader example has P≥20 and MCleader=20. Bertrand uses its own separately stated assumptions.
Keep these conditions throughout the comparison; change only what the case above specifies.
What to inspect
For a cartel, set joint MR=MCi and inspect each firm’s deviation.
Compare before and after, and locate the conclusion on the graph.
5 MINUTES · TRANSFER THE IDEA
Can you explain it without the lesson?
Explain why a cartel can maximize joint profit yet remain unstable when members can expand output.