Home » Duopoly + Dominant Firm Consider the global market for crude oil, consisting of Saudi Arabia, Iran, and the rest of the world.

# Duopoly + Dominant Firm Consider the global market for crude oil, consisting of Saudi Arabia, Iran, and the rest of the world.

Duopoly + Dominant Firm

Consider the global market for crude oil, consisting of Saudi Arabia, Iran, and the rest of the world. Suppose that price taking consumers in the rest of the world have demand for crude oil given by:

P=500-0.75Q

Assume that price-taking fringe suppliers of crude oil in the rest of the world have marginal costs given by:

P=400 +0.6Q

Suppose that Saudi Arabia has marginal costs given by:

P=50+0.25Q

And Iran has marginal costs given by:

P=50+0.5Q

(Assume that neither Iran or Saudi Arabia has demand of their own). Suppose that Saudi Arabia and Iran are contemplating forming a Cournot duopoly cartel (Assume residual demand represents case 3).

A. What is the optimal amount of crude oil that Saudi Arabia, Iran and the rest of the world produces?

B. What is the equilibrium price of crude oil in the market?

C. What is the mark-up charged by Saudi Arabia and Iran?

D. What are the profits to Saudi Arabia and Iran?

E. What is the share of Saudi Arabia’s production to total duopoly production?

F. How does the Cournot mark-ups compare to the full enforcement (multi plant monopoly consisting of Saudi Arabia and Iran) mark-ups?

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