Duo: P = A – B(Q1 + Q2) 1 = (P – c)Q1 – F Sub: (A – BQ1 – BQ2)Q1 – cQ1 – F
Multiply out: 1 = AQ1 – BQ12 – BQ1Q2 – cQ1 – F = Firm 1’s total | max: Diff by Q1: A – 2BQ1 – BQ2 – c = 0
Solve: Q1 = (A – c – BQ2)/2B RR: Q1 = (A – c)/2B – ½Q2 OR Q2 = (A – c)/2B – ½Q1 BR
⇌: Set Q1 = Q2 Q1 = (A – c)/2B – ½Q1 RR: 1.5Q1 = (A – c)/2B Solve: Q1 = (A – c)/3B = Q ⇌
(A – c)/2B = Output if rival’s is 0 | ½Q2 : As Q2 increases Q1 decreases by 0.5– NSI
Sub in D Fn: PO = A – B(Q1 + Q2) PO = A – B(2(A – c)/3B) PO = (A + 2c)/3 = P ⇌
Sub in Fn: 1 = (A – c)2/9B – F and 2 = (A – c)2/9B – Fc = ⇌
Sub Q2 into 1: Q2 = (A – c)/2B – ½Q1 1 = (A – BQ1 – BQ2)Q1 – cQ1 – F Sub & RR: 1 = ½(A – c – BQ1)Q1
Sub Q1 into firm 2’s BR: Q2 = (A – c)/2B – (A – c)/4B Solve: Q2 = (A – c)/4B = Q ⇌
– F Diff= by Q1: ½A – ½c – BQ1 Set = 0: Q1 = (A – c)/2B = max output if firm 2 responds optimally
Sub for Q1 and Q2 in D Fn: PO = A – B(Q1 + Q2) PO = A – B(3(A – c)/4B) PO = (A + 3c)/4 = ⇌
Sub for Q1, Q2 and PO for : 1 = (A – c)2/8B – F And 2 = (A – c)2/16B – F = P ⇌
c)/4B and Q2 = (A – c)/4B | are ½ of M: 1 = 2 = (A – c)2/8B – F = ⇌ | P is ½ of PM = P = (A + c)/2 = P ⇌
QM = (A – c)/2B < Q1 + Q2 = 2(A – c)/3B| output in duopoly | QM = max industry : So If prod ½ QM: Q1 = (A –
Example: Firm 1 sets Q as ½ of QM (soft) Firm 2’s BR = Q2 = (A – c)/2B – ½Q1
Sub in Q1: Q2(A – c)/2B – ½(A – c)/4B Q2 = 3(A – c)/8B – Firm 2 BR (aggression), so: Price: P = (3A + 5c)/8
Profits: 1 = 3(A – c)2/32B – F and 2 = 9(A – c)2/64B – F Defection from a firm
Tacit collusion: coll = (A – c)2/8B – F | Cournot Nash Equilibrium: cour = (A – c)2/9B – F | Aggressive to soft: win
= 9(A – c)2/64B – F Soft to aggressive: lose = 3(A – c)2/32B – F Where: win > coll > cour > lose
Symmetrical Strategic FDI: π = (A – z)2/4B – G | z = per unit cost | z = c + t when exporting or c for FDI
EE: π1 = π2 = (A – c – t)2/9B FF: π1 = π2 = (A – c)2/9B – G
Asymmetrical Strategic FDI: πi = (A – 2zi + zj)2/9B – G zj = rivals per unit costs
EF: π1 = (A – c – 2t)2/9B, π2 = (A – c + t)2/9B – G FE: π1 = (A – c + t)2/9B – G, π2 = (A – c –
2t)2/9B
Threshold 1 - πMM = (A – c)2/9B – G = πEM = (A – c – 2t)2/9B G = 4t(A – c – t) / 9B -
Threshold 2 - πEE = (A – c – t)2/9B = πME = (A – c + t)2/9B – G G = 4t(A – c) / 9B
Threshold 3 - πEM = (A – c – 2t)2/9B = πME = (A – c + t)2/9B – G G = 6t(A – c) – 3t2 / 9B
Mainstream economics sees entrepreneur as passive allocator under perfect info, rationality, and infinite supply—too
idealised; ignores bounded rationality, uncertainty, and firm-level heterogeneity. Coase (1937) sees firms arise when
market transaction costs exceed in-house org costs; replaces price mechanism with hierarchy. Strong on firm
existence, but vague on internal control, trust, and innovation. Alchian & Demsetz (1972) reject Coase’s ‘fiat’; firms
not defined by authority but by monitoring team production. Residual claimant incentivised to reduce shirking. Adds
micro-foundation but still contractual, not dynamic. Williamson (1975, 1985) builds on Coase, adding bounded
rationality (people can’t foresee/process all future events) and opportunism (people may act in self-interest with
guile). Firms internalise when asset specificity, frequency, and uncertainty make contracts too risky or costly. Strong
on firm boundaries, but criticised for overemphasising opportunism, neglecting trust, cooperation, and learning. Kay
(1997) critiques asset specificity focus—argues “replaceability” matters more (e.g. R&D often in-house despite low
specificity). Ghoshal & Moran (1996) say opportunism-focus is self-fulfilling; erodes trust and kills initiative—
support capabilities-based view. Nelson & Winter (1982) offer evolutionary theory: firms are routinised knowledge
adapting via learning-by-doing; cope with bounded rationality through variety, selection, and retention. Adds realism
but harder to quantify. Schumpeter (1942) sees entrepreneur as innovator disrupting equilibrium via new goods,
methods, markets, sources, and structures; profit as reward for creation, not discovery. Strong on growth, weak on
coordination. Kirzner (1973) sees entrepreneur as alert to disequilibrium; profit as arbitrage reward. Reactive, not
creative; weaker on structural change. Casson (1982) sees entrepreneur as judgmental decision-maker under
uncertainty; institutional lens but assumes rational calculation. Shackle/Earl go further: entrepreneurs imagine profit
opportunities via mental models, risk frames, and customer insight—richly behavioural, hard to model. Capabilities
View: firms = bundles of (esp. tacit) knowledge built through learning-by-doing, routines, and path dependence.
Competitive advantage needs VRIO traits (valuable, rare, inimitable, organised); growth via related diversification
leverages synergies, spreads risk. Teece (1997) adds dynamic capabilities: firms succeed by sensing, seizing,
reconfiguring assets in shifting environments—strong on adaptation, aligns with evolutionary theory. Product
Differentiation Theories: Hotelling models location strategy (minimal vs maximal differentiation); balances market
share vs power. Scherer links entry barriers to fixed costs vs profit; explains over/under-supply of variety. Lancaster
(1966): goods = bundles of characteristics; customers choose ideal points. Behavioural Economics (Earl, Wakeley)
improves on neoclassical theory by showing bounded rationality, aspiration levels, heuristics, and elimination rules
guide choice—explains segment-based capital investment. Overall, classical theories (Coase, TCE) clarify structure,
but capabilities-based and behavioural views better capture firm dynamics, learning, and customer-centric strategy
under uncertainty. Qs: An economy is a system of distributed skills, knowledge and capabilities
