Cournot competition in a differentiated oligopoly (Q1095776)

This paper studies product-quantity equilibria in an oligopoly. Products are differentiated on a simple dimension which behaves like ``quality'' - each consumer prefers higher values on this dimension to lower values - and consumers differ in their marginal willingness to pay for quality. Each firm chooses simultaneously a quality-quantity pair. It is well- known that a pure strategy equilibrium in product-price pairs does not exist in this model. The main focus of the present paper is on the necessary conditions for a pure strategy equilibrium in quality-quantity pairs. These conditions have a recursive structure, and can be solved for the ``local'' equilibrium - an equilibrium where the ordering of the firms' products is exogenously fixed. It is shown that the equilibrium is asymmetric in general - different firms choose different products and supply different quantities - even though firms are identical. It is also essentially unique, and inefficient. As the number of firms approaches infinity, however, the equilibrium becomes efficient. Moreover, in an example widely studied in the literature, the distribution of products converges weakly to the distribution of consumer types (assumed to be uniform).