Basic game theory tells us different strategies lead to different market outcomes, the two main oligopolistic setups are Bertrand and Cournot. In an oligopoly with Bertrand competition, the market price will be the same as the price in a perfectly competitive market. However, in the real world, we do not always see a market with homogenous products. In addition, there are many factors that determine a firm’s competitiveness and profitability. Today I would like to talk which factors make firms willing to compete with each other in an oligopolistic market.
First, when companies are free to increase their productions, it will make competition more likely to happen, because if there is a production cap, the firm cannot capture a market share beyond a certain level. Competition is only sensible when a company is able to increase its profits while a production cap places a cap on the company’s profitability in the market. Secondly, it seems easy for companies to get market shares from others in the market. For example, when phone makers saw Apple gaining much larger market shares from traditional phone makers, they thought they could adopt similar strategies and challenge the existing traditional players. Thirdly, when companies see that the market size is expanding and a large market has not been touched yet, they will compete to capture more market size, because this will increase firms’ revenues.
Of course, there are other factors and often competition happens when a new sector just appears.
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