Question

Consider the following two industries: Industry A (Airlines) firms must decide on capacity well in advance of setting prices, while in Industry B (Banking) firms can quickly adjust production to meet any quantity demanded. Suppose that the number of firms in each industry increases from a monopoly to a duopoly. In which industry would you expect this change to have a stronger competitive effect? [Hint: First think about which model, Bertrand or Cournot, better describes each industry. Then use this answer to forecast what happens on moving from a monopoly to a duopoly]

Answer 1

Airline industry will be described appropriately by Cournot model in which firm's compete in the basis of the output which is defined independently and we'll in advance where as in the Banking sector the price s are decided where as the quantity can we quickly adjusted to meet the demand. As companies move from monopoly to a duopoly and in Cournot model the companies are having predefined output and consumers demand adjust to that of the total output of the two firms and they in turn beging to act as monopoly with their set of output so in this case the competitive effect will be lower in Airline when compared to the Banking where the output is quickly adjusted to the demand and hence price will be varying with higher degree of competition among the two firm to have a larger market share.