Cournot duopoly (Cournot competition)

- 2 Firms
- Simultaneous game
- Identical cost functions
- Homogeneous products in a static setting
- Prices b/w Price (Monpoly & Perfect Competition)
- OUTPUT: Below Perfect Competition But Better than Monopoly
- Cournot duopolies quantity sold SAME

- Price: a – b(Q)
- Q= q1 + q2
- Identical Cost Function
- MC=0 (both Firms)

REATION FUNCTION:

MAXIMUM TOTAL Q:

THEORY: Both firms → vying for maximum benefits → Derived From→ maximum sales volume (a
larger share of the market) and higher prices (higher profitability) → PROBLEM!!! → High
Profitability Through ↑↑ Prices → Damage Revenue→ Low Market Share…

COURNOT MODEL: Maximise both market share and profitability by defining optimum prices

CRITISISM: FIRMS DO NOT CHOOSE QUANTITIES → They Compete in PRICE (BERTRAND

MODEL EFFECTIVE)
 STAKELBERG MODEL (First Mover Advantage)

- Price: a – b(Q)
- Q= q1 + q2
- 2 Firms
- SEQUENTIALY game
- Identical cost functions
- Identical Cost Function
- MC=0 (both Firms)
- TWO STAGE (DYNAMIC GAME)
- imperfect competition

BACKWAD INDUCTION METHOD TO SOLVE GAME (START FROM PERIOD 2)

Leader (q1) : ↑↑ Brand Equity → Decides 1st which Quant to Sell

Follower (q2): Observer → Decides which Quantity (q2) to Produce

CONIDER PERIOD TWO (FOLLOWER):

Consider you as Firm 2→Reaction Function:

NOW FIRM 1 (LEADER) WILL HAVE THIS PROFIT FUNCTION (ALEADY KNOWS FIRM NO: 1
Ref Function)

QUANTITIES SOLD:

Q1( Leader) :

Q2(FOLLOWER):
Industry Output:

Profits:

Output: Between Cournot and Perfect Competition

BERTRAND MODEL

***Bertrand’s equilibrium occurs when NE: (P1=P2=MC), being MC the marginal cost, yielding the
same result as perfect competition.
 Industry Profits= 0
Industry Output→ Bertrand Output = Output under PC.
Prices = MC
Identical Output (But not realistic Profits)

EDGEWORTH CRITISIM OF BETRAND MODEL:

- Capacity constraints (P1=P2=C → NE? NO!)
- No equilibrium Point
- × Pure Strategy → Limited Capacity
SOLUTIUON: KREP & SCHEINKMAN MODEL:
COURNOT MODEL CONSIDER TWO STAGE DYNAMIC BACKWARD INDUTION:
(1) COMPETE IN CAPAITY (2) COMPETE IN PRICES

LETURE 5 ( Dynamic model of Oligopoly )

NE: (IN, Acquiesce) & (Out, Fight)