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Cournot Model

- gans-jie-2007
- oligopoly
- Cournot Competition
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As 90

Output

Bs

Reaction

Function

As

Reaction

Function

45

45

90

Bs

Output

Assumptions

Two firms A, and B

produce widgets

Assumptions

Two firms A, and B

produce widgets

The industry demand

function is D

Assumptions

Two firms A, and B

produce widgets

The industry demand

function is D

Firm A produces qA;

firm B produces qB

Assumptions

Two firms A, and B

produce widgets

The industry demand

function is D

Firm A produces qA;

firm B produces qB

Firm A takes its

demand function as D

-qB

qb

Da

Q

Assumptions

Two firms A, and B

produce widgets

The industry demand

function is D

Firm A produces qA;

firm B produces qB

An important

assumption, the heart

of the Cournot model.

D

qb

demand function

as D -qB

The Cournot Model

Da

Q

Solving As problem

Da

D

Solving As problem

Da

D

MR

MC

Solving As problem

Da

D

p*

MR

MC

The

Symmetry

Just as Firm A is choosing qA to maximize

profits, so too is Firm B choosing qB to

maximize profits.

Symmetry

Just as Firm A is choosing qA to maximize

profits, so too is Firm B choosing qB to

maximize profits.

If B changes its output, A will react by

changing its output.

A Reaction Function

We do the mathematical approach first and

then the graphical approach.

A Reaction Function

The industry demand function

Q = 100 2p.

A Reaction Function

The industry demand function

Q = 100 2p.

The inverse demand function is

P = 50 (1/2)Q

A Reaction Function

The industry demand function

Q = 100 2p.

The inverse demand function is

P = 50 (1/2)Q

As demand function is then

P = 50 (1/2)(qA+qB)

The Cournot Model

A Reaction Function

As demand function is then

P = 50 (1/2)(qA +qB)

= PqA 5qA

A Reaction Function

As demand function is then

P = 50 (1/2)(qA +qB)

The firms profits are

A Reaction Function

= [50 (1/2)(qA + qB)]qA 5qA

A Reaction Function

= [50 (1/2)(qA + qB)]qA 5qA

= 50 qA(1/2) qA 2 (1/2)qBqA

5qA

A Reaction Function

= [50 (1/2)(qA + qB)]qA 5qA

= 50 qA(1/2) qA 2 (1/2)qBqA 5qA

A Reaction Function

1 2 1

45qa qa qa qb

2

2

A Reaction Function

1 2 1

45qa qa qa qb

2

2

d

1

45 qa qb

dqa

2

The Cournot Model

A Reaction Function

d

1

45 qa qb 0

dqa

2

1

qa 45 qb

2

The Cournot Model

Symmetry

qA = 45 (1/2)qB

There is a similar reaction

function for B

qB = 45 (1/2)qA

qA = 45 (1/2)qB

qB = 45 (1/2)qA

qA = 45 (1/2)[45 (1/2)qA]

qA = 45 (1/2)[45 (1/2)qA]

qA = 22.5 + (1/4)qA

qA = 45 (1/2)[45 (1/2)qA]

qA = 22.5 + (1/4)qA

(3/4)qA = 22.5

qA = 45 (1/2)[45 (1/2)qA]

qA = 22.5 + (1/4)qA

(3/4)qA = 22.5

qA = (4/3)22.5

The Cournot Model

qA = 45 (1/2)[45 (1/2)qA]

qA = 22.5 + (1/4)qA

(3/4)qA = 22.5

qA = (4/3)22.5

qA = 30

qB = 30

The Cournot Model

A Graphical Approach

qA = 45 (1/2)qB

We want to use the reaction function to

come to a graphical solution,

A Graphical Approach

qA = 45 (1/2)qB

When B produces nothing A should

react by producing the monopoly

output (45).

A Graphical Approach

qA = 45 (1/2)qB

When B produces nothing A should react by

producing the monopoly output (45).

competitive industry (90), A should

react by producing nothing.

The Cournot Model

A Graphical Approach

qA = 45 (1/2)qB

When B produces nothing A should react by

producing the monopoly output (45).

When B produces the output of the

competitive industry (90), A should react by

producing nothing.

The Cournot Model

As

Output

Bs

Output

The Cournot Model

As

90

Output

45

If B

produces

nothing, A

acts like a

monopoly

If B produces

the competitive

output, A

produces

nothing.

90

Bs

Output

As

Output

As

Reaction

Function

45

90

Bs

Output

As

90

Output

45

If A produces the

competitive output,

B produces nothing.

As

Reaction

Function

If A produces

nothing, B acts like

a monopoly.

45

90

Bs

Output

As 90

Output

Bs

Reaction

Function

As

Reaction

Function

45

45

90

Bs

Output

As

90

Output

45

reaction functions, they

react and change output.

Here B expands, A

contracts.

45

90

Bs

Output

As

Output

Bs

Output

The Cournot Model

As

Output

If A is here,

B wants to

be here

Bs

Output

The Cournot Model

As

Output

If B is here,

A wants to

be here

Bs

Output

The Cournot Model

Equilibrium

As

Output

Bs

Reaction

Function

As

Reaction

Function

Bs

Output

The Cournot Model

Plot the reaction functions

If B produces nothing, A behaves like a

monopoly

If B produces competitive output, A produces

nothing

End

2003 Charles

W. Upton

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