In this module we introduce competition by considering the addition of one additional firm to a monopoly market, forming what is called a duopoly. The presence of an additional firm results in strategic behavior since one firm's action affect the other firm's outcome. The main impact of competition is to reduce the market price and increase total supply to the market while reducing firm profit relative to the monopoly outcome. Consumers benefit from the changed market conditions more than the loss in total profit implying an improvement in economic efficiency, again relative to the monopoly outcome. The outcome for several firms competing against each other, called an oligopoly market, is discussed. Finally, the results of the model are reconstituted in the form a game (game theory) which illustrates a Prisoner's Dilemma outcome arises due to competition. Collusion by the two firms in a duopoly can raise both firm's profit but the resulting cooperative outcome is unstable and prone to failure.

Theory of Duopoly and Oligopoly - 51 minutes

Game Theory with a Duopoly - 13 minutes