cournot model
TRANSCRIPT
COURNOT MODEL FOR DUOPOLY MARKET
Presented by,Yagnesh Sondarva04-2664-2015MSc. Agri.ExtensionBACA, Anand
Market Structure
1) Number of firms in market2) Product Differentiation
Markets are often described by the degree of concentration
Monopoly is one extreme with the highest concentration - one seller
Perfect competition is the other extreme with innumerable sellers
Oligopoly involves few sellers engaging in strategic competition
Number of SellersDegree of Product Differentiation
Many Few One Dominant
One
Firms produce identical products
Perfect Competition
Oligopoly with homogeneous products
Dominant firm
Monopoly
Firms produce differentiated products
Monopolistic Competition
Oligopoly with differentiated products
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PERFECT
Perfect Competition
1) Many Firms2) Homogeneous Productsexamples: farm commodities like wheat, Pulses
Monopolistic Competition
1) Many Firms2) Differentiated ProductsExamples: retail trade
Monopoly 1) One Firm2) One ProductExample : railway , post , electricity, Insurance
(government monopoly)
Oligopoly
A) Homogeneous Products Oligopoly
1) Few Firms2) Homogeneous ProductsExamples: steel ,chemical.
B) Differentiated Products Oligopoly
3) Few Firms4) Differentiated ProductsExamples: automobile , computer
Oligopoly
Market has a small number of sellers Pricing and output decisions by each firm
affects the price and output in the industry Oligopoly models (Cournot, Bertrand) focus on
how firms react to each other’s moves
Oligopoly – Characteristics
Product differentiation may or may not exist Barriers to entry Small number of firms
Scale economies Patents Technology Name recognition Strategic action
Oligopoly
Examples Automobiles Steel Aluminum Petrochemicals Electrical equipment
Management Challenges
Strategic actions to deter entry Threaten to decrease price against new competitors
by keeping excess capacity
Rival behavior Because only a few firms, each must consider how
its actions will affect its rivals and in turn how their rivals will react
Interdependence
Your actions affect the profits of your rivals.
Your rivals’ actions affect your profits
An ExampleYou and another firm sell
differentiated products such as cars.
How does the quantity demanded for your cars change when you change your price?
Oligopoly – Equilibrium
If one firm decides to cut their price, they must consider what the other firms in the industry will do
Could cut price some, the same amount, or more than firm
Could lead to price war and drastic fall in profits for all
Actions and reactions are dynamic, evolving over time
Oligopoly – Equilibrium
Defining Equilibrium Firms are doing the best they can and have
no incentive to change their output or price All firms assume competitors are taking
rival decisions into account Nash Equilibrium
Each firm is doing the best it can given what its competitors are doing
We will focus on duopoly Markets in which two firms compete
Duopoly models
Cournot model Edgeworth model Chamberlin model Price leadership model Bertrand model Kinked demand curve Centralized cartel model Market sharing cartel model
Cournot model
Developed by French economist
Augustin cournot in 1838.
Cournot model
Oligopoly 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 produce
Assumptions of Cournot ModelFour assumptions:
1. there are two firms and no other firms can enter in the market,
2. the firms have identical costs,
3. they sell identical products
4. the firms set their quantities simultaneously.
O A B
DDB = demand curve Suppose OA=AB max daily output of each producer
Total output=OA+AB=OB
D
K
O A B
P
DB= demand curve OA=daily max output OA= max profitMa x revenue =OAPK
Profit of AAs profit
A producer
P
Q
D
O A H B
B producer B assume A will produce ½ of OB=OA PB = demand curve for himB produce AH=1/2 AB
Total output OA+AH=OH Price fall =HQ
Total profit=OHQFIs less than OAPK of 1st condition
As profit = OAGFBs profit =AHQGProfit of A reduced due to AH produced by B
Bs profit
G
K
FAs profit As profit
P
Q
D
O A H B
G
K
FAs profit As profit
A PRODUCER A will consider & assume B will continue produce AHSo A produce 1/2(OB-OH)=OTReduce OA to OT A produce= OT B produce=AH
Total output=OT+AH=ONPrice =NR
Total profit=ONRSAs profit =OTLSMore than OAGF Bs profit=TNRLMore than AHQF
T
R
N
S L
As profit Bs profit
G
B surprised by reduction of output to OT by A and Also find his share of total profit is less than A So B assume A will continue produce OT And B find his maximum profit by producing output=1/2(OB-O T)=1/2 TBB increase output to ½ TB
Producer A consider and find that he can maximize his profit by producing output=1/2 OB-output of B
This process of adjustment and readjustment by each producer will continue ,A being forced gradually to reduce his output B being able to increase his output gradually until total output OM is produced OM=2/3 OF OBAnd each producing same amount of outputA= OCB=CMOC=CM
P
Q
D
O A H B
G
K
FAs p
T
R
N
S L
A will consider & assume B will continue produce AHSo A produce 1/2(OB-OH)=OTReduce his production
A produce= OC B produce=CM
Total output=OC+CM=OMPrice =MJ
Total profit=OMJEAs profit =OCWEBs profit=CMJW
As profit
E J
C
W
Bs profit
M
Throughout the process of adjustment & readjustment each producer assume that the
Other will keep his output constant at the present level
& then always find his maximum profit by producing output½(OB-present output of other )
P
Q
D
O A H B
G
K
FAs p
T
R
N
S L
As profit
E J
C
W
Bs profit
M
A producer start by producing OA=(1/2OB)And continue reduce until OCFinal output OC of A =OB(1-1/2-1/39…….)=1/3 OB =1/2 OM
B producer start by producing AH=1/4 of OBAnd continue increase until CMFinal output CM of B=OB(1/4+1/16+1/64…..)=1/3 OB=1/2 OM
TOTAL OUTPUT =0B(1-1/2+1/4-1/8+1/16-1/39+1/64……)=2/3 OB=OM
A = 1/3 OB = OCB = 1/3OB= CM
½ (OB-1/3 OB) which is equal to 1/3 OB=OC=CMWhen each producing 1/3 OB so that total output of both are 2/3 OB no one is able to increase profit by further adjustment in output
EQUILIBRIUMTotal output is 2/3 of OB Each one producing 1/3 of OB
Criticism Behavioural pattern of firm is naive . Means firm
not know from past miscalculation of competitors reaction.
Quantity produced by competitor is as assumed constant at a each stage
Model can be extended to many number of firms however it is a closed model in that entry is not allowed number of firms remain same through out adjustment process.
It doesn’t say how long adjustment period will be.
Thank you