Tirole's Theorem

Tirole's Theorem relates to how firms set prices and quantities in markets with multiple products and competitors. It states that when firms are strategic and consider rivals' reactions, the equilibrium outcome (the stable state) can be characterized by comparing profits from different pricing strategies. Essentially, the theorem provides conditions under which a firm prefers certain pricing and output policies to maximize profits, considering competitors’ responses. This helps us understand complex market interactions, like whether firms will cooperate (collude) or compete fiercely, based on the structure of their costs and market demand.