Oligopoly and Strategic InteractionsSanja Samirana
PattnayakIIMTOligopolyThe Cournot ModelOligopoly model in which
firms produce a homogeneous good, each firm treats the output of
its competitors as fixed, and all firms decide simultaneously how
much to produceirm will adjust its output !ased on what it thinks
the other firm will produceOften called "uantity
competition"uantity competition # for example international oil
production$23456789101112131415Cournot model: Example%n &xample
of the Cournot &"uili!riumTwo firms face linear market demand
cur'e and has short run marginal cost scheduleMarket demand is P (
)* + , , is total production of !oth firms- , ( ,. / ,01oth firms
ha'e MC. ( MC0 ( *&ach irm2s action is to choose a le'el of
productionirm i2s profit is ( ) ( ) [ ] Q Q Q Q Qi j i j i i+ = )*
, 16Duopoly Example3e want to calculate what each firm2s profit
maximi4ing output le'el, i$e$ Their !est response, to the other
firms output decision$This is called the firm2s reaction
functionirm .2s 5eaction Cur'e M56,07(MC17Duopoly
ExampleCalculating the reaction functions0.8Cur'e 5eactions 09
irm0.8Cur'e 5eactions .9 irm*0 )*.00.. .0 . . . .QQQQMC MRQ Q Q R
MR = == = = =18Duopoly ExampleIn a :ash e"uili!rium Q1 and Q2 are
!est responses to each other$ ( )each ;.** are profits , .*
)*0*.*0.8.8
