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CHAPTER SUMMARY 563

individual physician’s demand curve would be more moved (and thus had poorer information about local
likely to resemble D in Figure 13.16 than D. doctors) were higher than in markets in which house-
To explore whether the efficiency of consumer holds were more settled. They were. This and other
search might have had something to do with the pat- evidence they collected suggests that the efficiency of
tern of prices they observed, Pauly and Satterthwaite the consumer search process is an important determi-
looked at whether physicians’ prices in markets in which nant of prices in local physicians markets.
a large proportion of the population had recently

CHAPTER SUMMAR Y

• In a homogeneous products oligopoly, a small number • We can reconcile the different predictions made
of firms sell virtually identical products. In a dominant about industry equilibrium in the Cournot and Bertrand
firm market, one firm has a large share of the market and models in two ways. First, the Cournot model can be
competes against numerous smaller firms, with all firms thought of as pertaining to long-run capacity competi-
offering virtually identical products. In a differentiated tion, while the Bertrand model can be thought of as per-
products oligopoly, a small number of firms sell differen- taining to short-run price competition. Second, the two
tiated products. Under monopolistic competition, many models make different assumptions about the expecta-
firms sell differentiated products. tions each firm has about its rivals’ reactions to its com-
petitive moves.
• The four-firm concentration ratio (4CR) and the
Herfindahl-Hirschman Index (HHI) are two quantita- • In the Stackelberg model of oligopoly, one firm (the
tive metrics used to describe market structures. leader) makes its quantity choice first. The other firm
(the follower) observes that output and then makes its
• The Cournot model of a homogeneous products
oligopoly presumes that each firm is a quantity taker—the quantity choice.
firm accepts its rivals’ outputs as given and then produces • In the Stackelberg model, the leader generally pro-
an output that maximizes its profit. At a Cournot equilib- duces a higher quantity of output than it does in the
rium, each firm’s output is a best response to all other Cournot equilibrium, while the follower produces less
firms’ outputs, and no firm has any after-the-fact regrets than its Cournot equilibrium output. By choosing
about its output choice. (LBD Exercises 13.1, 13.2) its quantity first, the leader can manipulate the follower’s
output choice to its advantage. As a result, the leader
• The Cournot model applies to firms that make a sin-
gle, once-and-for-all decision on output. The Cournot earns a higher profit than it would have earned at the
equilibrium is a natural outcome when firms simultane- Cournot equilibrium.
ously choose output on a once-and-for-all basis and have • In a dominant firm market, the dominant firm takes
full confidence in the rationality of their rivals. the competitive fringe’s supply curve into account in set-
ting a price. If the fringe’s supply is growing over time, the
• Cournot firms have market power. The Cournot
equilibrium price will be less than the monopoly price dominant firm’s price will fall and its share of the market
but greater than the perfectly competitive price. (LBD might also fall. To prevent this, the dominant firm might
follow a strategy of limit pricing.
(LBD Exercise 13.3)
Exercise 13.2)
• Two products are vertically differentiated when con-
• With a larger number of firms in the industry, the
Cournot equilibrium industry output goes up and the sumers view one product as unambiguously better or
equilibrium market price goes down. worse than the other. Two products are horizontally dif-
ferentiated when some consumers regard one as a poor
• We can characterize the Cournot equilibrium using substitute for the other, while other consumers have the
a modified inverse elasticity pricing rule (IEPR). opposite opinion.
• In the Bertrand model of a homogeneous products • In a Bertrand equilibrium with differentiated prod-
oligopoly, each firm selects a price to maximize profits, ucts, equilibrium prices generally exceed marginal cost.
given the prices other firms set. If all firms have the same When horizontal product differentiation between the
constant marginal cost, the Bertrand equilibrium price is firms is significant, the gap between prices and marginal
equal to marginal cost. costs can be substantial. (LBD Exercise 13.4)