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    Cournot Oligopoly

    Uploaded by

    Harleen Kaur
    The document discusses Cournot oligopoly models and welfare. It begins by outlining the aims and learning outcomes, which include understanding how reaction curve diagrams translate to traditional monopoly diagrams, working through numerical examples comparing Cournot oligopoly to other market structures, and considering the finer aspects of the model. The document then presents Cournot's model of quantity competition and defines the Cournot equilibrium. A numerical example is used to illustrate firm reaction curves and how the Cournot equilibrium is found. This equilibrium is then compared to perfect competition and monopoly equilibriums using demand and cost conditions. The document concludes by noting Cournot equilibrium approaches perfect competition as the number of firms increases.

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    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd

    Cournot Oligopoly

    Uploaded by

    Harleen Kaur
    315 views30 pages
    The document discusses Cournot oligopoly models and welfare. It begins by outlining the aims and learning outcomes, which include understanding how reaction curve diagrams translate to traditional monopoly diagrams, working through numerical examples comparing Cournot oligopoly to other market structures, and considering the finer aspects of the model. The document then presents Cournot's model of quantity competition and defines the Cournot equilibrium. A numerical example is used to illustrate firm reaction curves and how the Cournot equilibrium is found. This equilibrium is then compared to perfect competition and monopoly equilibriums using demand and cost conditions. The document concludes by noting Cournot equilibrium approaches perfect competition as the number of firms increases.

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    The document discusses Cournot oligopoly models and welfare. It begins by outlining the aims and learning outcomes, which include understanding how reaction curve diagrams translate to traditional monopoly diagrams, working through numerical examples comparing Cournot oligopoly to other market structures, and considering the finer aspects of the model. The document then presents Cournot's model of quantity competition and defines the Cournot equilibrium. A numerical example is used to illustrate firm reaction curves and how the Cournot equilibrium is found. This equilibrium is then compared to perfect competition and monopoly equilibriums using demand and cost conditions. The document concludes by noting Cournot equilibrium approaches perfect competition as the number of firms increases.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    315 views30 pages

    Cournot Oligopoly

    Uploaded by

    Harleen Kaur
    The document discusses Cournot oligopoly models and welfare. It begins by outlining the aims and learning outcomes, which include understanding how reaction curve diagrams translate to traditional monopoly diagrams, working through numerical examples comparing Cournot oligopoly to other market structures, and considering the finer aspects of the model. The document then presents Cournot's model of quantity competition and defines the Cournot equilibrium. A numerical example is used to illustrate firm reaction curves and how the Cournot equilibrium is found. This equilibrium is then compared to perfect competition and monopoly equilibriums using demand and cost conditions. The document concludes by noting Cournot equilibrium approaches perfect competition as the number of firms increases.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 30

    Cournot Oligopoly and Welfare

    by
    Kevin Hinde

    Aims
    In this session we will explore the
    interdependence between firms using the
    Cournot oligopoly models.
    We will see that interdependence in the
    market (i.e. actual competition even among
    a few firms) reduces the welfare losses of
    market power but does not eradicate them.

    Learning Outcomes
    By the end of this session you will be able to
    construct a reaction curve diagram and see how
    this translates into the traditional monopoly
    diagram.
    work through a numerical example comparing
    and contrasting Cournot oligopoly with other
    market structures.

    More mathematical students will be able to consider the finer aspects of the
    model.

    Welfare and (Tight) Oligopoly


    To understand the welfare implications of
    oligopoly we need to examine
    interdependence between firms in the
    market.
    Welfare depends upon the number of firms
    in the industry and the conduct they adopt.

    Augustin Cournot (1838)


    Cournots model involves competition in
    quantities (sales volume, in modern
    language) and price is less explicit.
    The biggest assumption made by Cournot
    was that a firm will embrace another's
    output decisions in selecting its profit
    maximising output but take that decision as
    fixed, i.e.. unalterable by the competitor.

    If Firm 1 believes that Firm 2 will supply the entire


    industry output it will supply zero.

    If Firm 1 believes that Firm 2 will supply the entire


    industry output it will supply zero.
    Market
    Demand
    Residual
    Demand for
    Firm1
    AC=MC

    Q1

    Q2

    If Firm 1 believes that Firm 2 will supply zero output


    it becomes a monopoly supplier.

    If Firm 1 believes that Firm 2 will supply zero output


    it becomes a monopoly supplier.
    Market Demand

    Residual
    Demand
    for Firm 1
    MC=AC
    MR
    Q2

    Q1

    D
    30 Q

    Q1

    Monopoly;
    P>MC

    Firm 1s
    reaction
    Curve
    Perfect
    Competition; P=MC

    Q2

    If Firm 2 makes the same conjectures then we get the


    following:
    Q1

    Firm 2s Reaction
    Curve; Q2=f (Q1)
    Cournot Equilibrium
    Firm 1s
    Reaction Curve;
    Q1=f (Q2)

    Q2

    Convergence to Equilibrium

    Convergence to Equilibrium
    Q1

    Q2

    A numerical example
    Assume market demand to be
    P = 30 - Q
    where
    Q= Q1 + Q2
    ie industry output constitutes firm 1 and firm 2s
    output respectively
    Further, assume Q1 = Q2
    and average (AC) and marginal cost (MC)
    AC = MC = 12

    To find the profit maximising output of Firm 1 given


    Firm 2s output we need to find Firm 1s marginal
    revenue (MR) and set it equal to MC. So,
    Firm 1s Total Revenue is
    R1 = (30 - Q) Q1
    R1 = [30 - (Q1 + Q2)] Q1
    = 30Q1 - Q12 - Q1Q2
    Firm 1s MR is thus
    MR1
    =30 - 2Q1 - Q2

    If MC=12 then
    Q1 = 9 - 1 Q2
    2
    This is Firm 1s Reaction Curve.
    If we had begun by examining Firm 2s profit
    maximising output we would find its reaction curve,
    i.e.
    Q2 = 9 - 1 Q1
    2

    We can solve these 2 equations and find equilibrium


    quantity and price.
    Solving for Q1 we find
    Q1 = 9 - 1 (9 - 1 Q1)
    2
    2
    Q1 = 6
    Similarly,
    Q2 = 6
    and
    P
    = 18

    Q1
    Q2= 9 - 1 Q1
    2

    18

    Cournot
    Equilibrium
    Q1= 9 - 1 Q2
    2

    18

    Q2

    Perfect Competition

    Under perfect competition firms set prices equal to


    MC. So,
    P= 12
    and equilibrium quantity
    Q= 18
    Assuming both supply equal amounts, Firm 1
    supplies 9 and so does Firm 2.

    Q1

    Q2= 9 - 1 Q1
    2

    Competitive
    Equilibrium

    18

    Q1= 9 - 1 Q2
    2

    9
    6
    4.5

    4.5

    18

    Q2

    Monopoly

    They would then maximise industry profits and share the


    spoils.
    TR =PQ =(30 - Q)Q = 30Q - Q2
    MR=30 - 2Q
    As MC equals 12 industry profits are maximised where
    30 -2Q = 12
    Q=9
    So Q1 = Q2 = 4.5
    Equilibrium price
    P= 21

    Q1
    Q2= 9 - 1 Q1
    2

    18

    Monopoly
    Equilibrium
    Q1= 9 - 1 Q2
    2

    9
    6
    4.5

    4.5

    18

    Q2

    Q1
    Q2= 9 - 1 Q1
    2

    18

    Cournot
    Equilibrium
    Q1= 9 - 1 Q2
    2

    9
    6
    4.5

    4.5

    18

    Q2

    Cournot Equilibrium compared using a traditional


    Monopoly diagram

    Cournot Equilibrium compared using a traditional


    Monopoly diagram
    P

    Monopoly

    Perfect
    Competition

    21

    12

    MC=AC
    D

    MR
    0

    18

    30 Q

    Cournot Equilibrium compared using a traditional


    Monopoly diagram
    P

    Cournot
    Perfect
    Competition

    21
    18
    12

    MC=AC
    D

    MR
    0

    18

    30 Q

    A further point that must be considered is that if the


    number of firms increases then the Cournot
    equilibrium approaches the competitive equilibrium.
    In our example the Cournot equilibrium output was
    2/3s that of the perfectly competitive output.
    It can be shown that if there were 3 firms acting
    under Cournot assumption then they would produce
    3/4s of the perfectly competitive output level.

    Firm numbers matter

    Firm numbers matter


    P

    2 Firm
    Cournot
    5 Firm
    Cournot

    21
    18
    15
    12

    MC=AC
    MR

    9 12

    15

    D
    18

    30 Q

    And Finally...
    A summary
    Have you covered the learning outcomes?
    Any questions?

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