Cournot Oligopoly
Cournot oligopoly is a market structure in which a small number of firms compete by setting their quantities of output. Each firm assumes that its rivals' quantities will remain constant and makes production decisions based on this assumption. This model allows firms to strategically choose their output levels to maximize their profits, taking into account the reactions of their competitors.
7 Key excerpts on "Cournot Oligopoly"
eBook - ePubMicroeconomics
A Global Text
- Judy Whitehead(Author)
- 2014(Publication Date)
- Routledge(Publisher)
...Together they sell of the market. This quantity sold represents more than the of the market which would be the monopoly quantity OQ A. Furthermore, it is sold at less than the monopoly price OP A. Because of their naïveté, the firms in the industry operating under the Cournot assumption do not maximize industry profits as they sell a greater quantity at a lower price than is necessary for this to happen. Generalization If there are three firms, it can be shown that each will produce of the market and together will supply of the market. Furthermore, if there are n firms each firm’s share of industry output would be: Consequently, total industry output would be: As a result, the larger the number of firms, the larger the industry output as a proportion of the total market and the lower the price. Output and price therefore approach the competitive output and price. It is possible to conclude that, if firms entering the global market in a globally oligopolistic industry make the Cournot assumption and behave in a myopic manner, the result would be a greater output at a lower price than otherwise. Criticisms of the Cournot model The model is criticized on several grounds. These include: The behaviour pattern is naïve. Firms do not learn from their experience and each one continues to believe that the other firm will keep its output constant even though this repeatedly fails to happen. This is considered to be unrealistic and particularly so in the modern world with the greater availability of information. The model is closed. There is neither entry nor exit after the initial entry of firms. 12.3 The Bertrand/Edgeworth Duopoly Model J. Bertrand and F. Edgeworth, writing in the 1880s and 1890s, respectively developed a model in response to a criticism of the Cournot model. They took issue with the Cournot assumption that each rival firm believes the other will hold its quantity constant...
eBook - ePubIntermediate Microeconomics
A Tool-Building Approach
- Samiran Banerjee(Author)
- 2014(Publication Date)
- Routledge(Publisher)
...Chapter 13 Oligopoly Just as economists make sense of what happens in competitive markets in terms of the market equilibrium that arises from the interaction of demand and supply, in an oligopolistic equilibrium, the behavior of firms corresponds to that of a Nash equilibrium (NE), i.e., each firm is maximizing its profit given the actions of the others. Oligopolies are usually modeled in one of two ways: firms either choose the quantities they wish to produce (quantity competition), or they choose the prices they wish to charge (price competition). While the game-theoretic ideas are exactly the ones introduced in Chapter 12, the only difference is that the firms typically choose their actions from a continuum rather than a finite set of discrete options. For instance, under quantity competition, a firm can choose any output ranging from zero to its capacity; under price competition, a firm can charge any price ranging from its marginal cost of production to the maximum price that buyers are willing to pay for it. 13.1 Static Quantity Competition We begin with an example of the classic duopoly model of Augustin Cournot that dates back to 1838 but is still one of the most important ways in which economists think about quantity competition. 13.1.1 Cournot duopoly Two firms produce a homogeneous good. Firm 1 produces quantity q1 and 2 produces q2, so the total quantity produced is Q = q 1 + q 2. The firms face an inverse market demand given by p = 200 – Q, or p = 200 – q 1 – q 2. It costs each firm $20 to produce each unit of output. We assume that each firm chooses its own output taking as given the other firm’s production level. Graphical representation One way to find a NE for this problem graphically is to plot each firm’s bestresponse to the other firm’s output choice and find a point of mutual bestresponse. To do so, assume that firm 2 has chosen its output level arbitrarily at q 2...
eBook - ePub- Peter Curwen, Peter Else(Authors)
- 2006(Publication Date)
- Routledge(Publisher)
...There are three possible ways of arriving at price equivalence: to let the market determine the price (as in perfect competition), leaving firms to concentrate upon adjusting their outputs; to initiate collusive price-fixing agreements; to allow one firm to take on the role of price leader, with other firms following whatever price is set. In the sections that follow we will be considering all of these alternatives, but our initial attention will be concentrated upon models that fit into category (a) above. Clearly, the element of uncertainty in this case cannot relate to the price variable, but must concern one firm’s lack of knowledge about how the other firm(s) will respond when it places its own output on the market. The other firm(s) might either do nothing, increase output or decrease output. One firm’s assessment of its rivals’ reaction in this respect is embodied in the concept of conjectural variations, which are a fundamental characteristic of oligopoly models. In order to introduce the role of conjectural variations as simply as possible, we will begin by examining models of duopoly. Classical duopoly models A number of duopoly models were developed by European economists during the nineteenth century. The best known are those by Cournot, Bertrand and von Stackelberg. It was not, however, until they were translated into English that they came to be appreciated fully for their innovatory features. The classic model is that developed by Cournot in 1838, which eventually appeared as Researches into the Mathematical Principles of the Theory of Wealth, published by Macmillan in 1897. The Cournot model The Cournot model in its original form involves competitive behaviour between two rival sellers of identical bottles of spring water produced at zero cost at mineral springs owned by the two rivals...
eBook - ePub- J. Bridge, J. C. Dodds(Authors)
- 2018(Publication Date)
- Routledge(Publisher)
...The rest of this chapter examines models of oligopoly behaviour and discusses some of the attempts to control oligopoly and monopoly through public policy. Oligopoly relates to fewness of sellers (duopoly where there are only two) and it can take the pure form (where there is an homogeneous product) or the more usual imperfect form where there is product differentiation. The distinguishing feature of oligopoly is not just the number of sellers but rather the mutual interdependence felt by oligopolistic firms in their decision making. We illustrated above how firms under conditions of perfect competition were price takers and free to pursue their output policy without recourse to considering the activities of other firms operating in the same market. An absolute monopolist with complete control of a product and its close substitutes, is also free to pursue an independent line of policy. When we come to oligopoly, however, a firm must have regard to the activities of other firms in the industry who are supplying for the same market. This is not to say that at all decision levels this will be the case but certainly for many strategic decisions governing the future course of the firm – such as the launching of new products and the associated advertising and promotional expenditures firms should take account of the anticipated reactions of rivals. Pricing decisions, although frequently classified as operating decisions * may also give rise to interdependence. In fact there may be a complex interplay of anticipated strategies and counter-strategies which firms engage in, a topic which is examined later in this section in terms of the theory of games. Firms can either ignore interdependence - particularly for operating decisions (as we illustrate later in the Baumol sales revenue maximisation model) or make some specific evaluation as to how rivals will react to a given policy change; this evaluation is sometimes called the ‘conjectural variation’...
eBook - ePub- Bonnie Nguyen, Andrew Wait(Authors)
- 2015(Publication Date)
- Routledge(Publisher)
...CHAPTER 15 Oligopoly DOI: 10.4324/9781315690339-15 15.1 Introduction We now turn to the case of oligopoly, a market that contains a small number of firms. Because there are only a handful of key producers in the market, the decisions of each firm have ramifications for not only itself but also for each of its competitors. For example, if Dell adjusts its price for one of its laptops, this will generally have an impact on its competitors, such as HP. Similarly, if a department store decides to advertise, it might be able to increase its customer base at the expense of other firms. Given the impact oligopolists have on one another, a firm’s strategic choice – be it price, its output, whether it introduces a new product and so on – will typically depend on what other firms in the market are doing. For instance, a brewer might consider dropping its price following a price reduction from a major beer manufacturer in the same market. In the soft-drink market, following the introduction of a new energy drink by Pepsi, Coca-Cola may choose to respond with its own alternative. In a similar way, if Samsung introduces a new phone handset, Apple will consider what it should do regarding a new version of its iPhone. A pharmaceutical company will consider what new drugs its rivals are trying to develop (and those that they already have patents for) when considering its own research and development programme. This strategic interaction between firms is a key feature of oligopoly; moreover, this sort of strategic interaction is absent in other market structures we previously studied (perfect competition, monopoly and monopolistic competition). We model strategic interaction in oligopoly using game theory. We have previously discussed the core concepts and tools of game theory in Chapter 3. In this chapter, our goal is to illustrate how game theory tools can be applied in the context of an oligopoly...
eBook - ePub- Lester G Telser(Author)
- 2017(Publication Date)
- Routledge(Publisher)
...III Applications of the Core to Oligopoly 1 Introduction Oligopoly refers to a market in which a “few” producers sell a homogeneous product to “many” buyers. However, this terminology is misleading because some aspects of oligopoly appear even when there are two sellers and one buyer. The theory of the core is well suited for analyzing those situations treated in oligopoly theory not only for its new results but also because it forces a rigorous examination of several often neglected aspects of oligopoly. For example, with core theory it is necessary to prove in every case whether or not there will be group rationality (Pareto optimality) and whether or not there will be price discrimination. The absence of price discrimination is often taken for granted, but it should not be, because a seller may maximize his return by charging every buyer the highest price he would be willing to pay rather than go without the good altogether. Why does this not always happen? These considerations pose the general problem of distinguishing between the assumptions and the deductions about behavior in oligopoly. Most economists develop theories which assume that individuals attempt to maximize something, be it utility, profit, the value of the firm or what not, subject to given constraints. One may regard the constraints as equivalent to assumptions about behavior. Of course, assumptions are indispensable elements of theory, but they are not proper subjects of dispute. The best guide for choosing among theories is to see which have useful empirical implications and not whether their assumptions are distasteful. For example, in the classical theory of monopoly it is assumed that all buyers pay the same price. This is an assumption about behavior. Presumably, some firms can obtain a higher return by price discrimination. Hence the absence or presence of price discrimination should be deduced and not assumed. The Cournot theory of duopoly also illustrates this thesis...
eBook - ePubExperimental Economics
Volume II: Economic Applications
- Pablo Branas-Garza, Antonio Cabrales, Pablo Branas-Garza, Antonio Cabrales(Authors)
- 2016(Publication Date)
- Palgrave Macmillan(Publisher)
...In these experiments, simultaneous (Cournot) and sequential (Stackelberg) oligopolies can emerge endogenously. On the other hand, Huck et al. (2006) experimentally study a spatial market with endogenous time choice. In line with actual political campaigns, candidates can decide endogenously when and where to locate. Their results show that allowing for endogenous timing can eliminate some of the more unappealing equilibrium characteristics of the standard model. In all these environments, the typical asymmetric results corresponding to the leader-follower structures receive less support than expected. In fact, the evidence is in favor of the symmetric results. This even occurs when the corresponding equilibria predict structures of the leader–follower type. Cournot markets with multiproduct firms have received less attention in the experimental literature than corresponding Bertrand markets. A recent experiment by Hinloopen et al. (2014) analyzes the impact of product bundling in quantity-setting oligopolistic markets. One firm has monopoly power in a first market but competes with another firm à la Cournot in a second market. They compare treatments where the multi-product firm: always bundles, never bundles, and chooses whether to bundle or not. They also contrast simultaneous (Cournot) to sequential (Stackelberg) moves in the duopoly market. Their data support the theory of product bundling: with bundling and simultaneous moves, the multi-product firm offers the theoretically predicted number of units. In the case of sequential moves, when the multi-product firm is the Stackelberg leader, the predicted equilibrium is better attained with bundling, although this equilibrium is the same with and without bundling. Oligopolistic models with vertical relationships, such as those between a manufacturer and a retailer, have received less attention by experimentalists than models with horizontal relationships...
