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# The Cournot Model

As 90
Output

Bs
Reaction
Function
As
Reaction
Function

45

45

90

Bs
Output

## Lectures in Microeconomics-Charles W. Upton

Assumptions
Two firms A, and B
produce widgets

## The Cournot Model

Assumptions
Two firms A, and B
produce widgets
The industry demand
function is D

## The Cournot Model

Assumptions
Two firms A, and B
produce widgets
The industry demand
function is D
Firm A produces qA;
firm B produces qB

## The Cournot Model

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

## The Cournot Model

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

## Firm A takes its

demand function
as D -qB
The Cournot Model

Da
Q

Solving As problem

Da
D

## The Cournot Model

Solving As problem

Da
D
MR

MC

## The Cournot Model

Solving As problem

Da
D

p*

MR

MC

## qa* Cournot Model

The

Symmetry
Just as Firm A is choosing qA to maximize
profits, so too is Firm B choosing qB to
maximize profits.

## The Cournot Model

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.

## The Cournot Model

A Reaction Function
We do the mathematical approach first and
then the graphical approach.

## The Cournot Model

A Reaction Function
The industry demand function

Q = 100 2p.

## The Cournot Model

A Reaction Function
The industry demand function
Q = 100 2p.
The inverse demand function is

P = 50 (1/2)Q

## The Cournot Model

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

## The Cournot Model

A Reaction Function
As demand function is then
P = 50 (1/2)(qA +qB)
The firms profits are

## The Cournot Model

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

## The Cournot Model

A Reaction Function
= [50 (1/2)(qA + qB)]qA 5qA
= 50 qA(1/2) qA 2 (1/2)qBqA
5qA

## The Cournot Model

A Reaction Function
= [50 (1/2)(qA + qB)]qA 5qA
= 50 qA(1/2) qA 2 (1/2)qBqA 5qA

## The Cournot Model

A Reaction Function

1 2 1
45qa qa qa qb
2
2

## The Cournot Model

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

## Solving for As Output

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

## Solving for As Output

qA = 45 (1/2)[45 (1/2)qA]
qA = 22.5 + (1/4)qA

## Solving for As Output

qA = 45 (1/2)[45 (1/2)qA]
qA = 22.5 + (1/4)qA
(3/4)qA = 22.5

## Solving for As Output

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

## Solving for As Output

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,

## The Cournot Model

A Graphical Approach
qA = 45 (1/2)qB
When B produces nothing A should
react by producing the monopoly
output (45).

## 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

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.

## Similar rules apply for Bs reactions.

The Cournot Model

## Graphing the Reaction Function

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

## Graphing the Reaction Function

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

## If A and B are off their

reaction functions, they
react and change output.
Here B expands, A
contracts.

45

90

Bs
Output

## Graphing the Reaction Function

As
Output

Bs
Output
The Cournot Model

## Graphing the Reaction Function

As
Output

If A is here,
B wants to
be here

Bs
Output
The Cournot Model

## Graphing the Reaction Function

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

## The Basic Steps

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