Firms have various strategic options at their disposal. In the most basic models of strategic interaction, firms choose a single strategic variable, quantity or price, once. In many markets, firms are seen as price setters. It thus appears natural to start with the analysis of price-setting firms in an environment with a few firms; we do so in Section 3.1. In other markets, however, it seems more reasonable to assume that firms choose quantities rather than prices; we analyse quantity competition in Section 3.2. We then proceed to compare price and quantity competition. First, in Section 3.3, we show that quantity competition can sometimes be mimicked by a two-stage model in which firms choose their capacity of production and next, set their price; we also directly compare price and quantity competition in a unified model of product differentiation. Second, in Section 3.4, we bring the comparison of price and quantity competition to a more general level by introducing the concepts of ‘strategic complements’ and ‘strategic substitutes’. Finally, in Section 3.5, we discuss the empirical investigation of industries with market power.

Price competition

We analyse here several models of price competition. We start with the standard Bertrand (1883) model where products are homogeneous. Then, we extend the model in two directions: first, we assume that firms have private information about their marginal costs of production; second, we consider differentiated products.