Other
Cournot Oligopoly Essay Plan
- Course
- Institution
Essay Plan on an essay on Cournot oligopoly
[Show more]
Seller
Follow
vibhavpandey
Content preview
Introduction:- Oligopoly is where there are a few large firms in the market and as the firms are large
relative to the market they respond strategically to each other
- Contemporary oligopoly models can be either price (Bertrand) or quantity setting (Cournot)
- Briefly explain principle of either Bertrand or Cournot model whichever applies: firms decide
how much output to produce/price to set as strategic variable
- Market structure:
1. Few large firms: seller is large enough to affect market price and the few rivals are large
as they respond strategically to changes in seller’s output
2. High barriers to entry: large firms persist over time as hard to enter
3. Product substitutability can be undifferentiated or differentiated: doesn’t affect market
power of the seller as this power stems from there being only a few large firms in the
market and entry barriers being high
Main Body:
- Assumptions of Oligopoly:
1. Buyers are price takers
2. Buyers and Sellers have complete info
3. Sellers are price makers: seller can influence the price when it sells output; seller sells
more when price is lower and hence we get a -ve sloped D curve as well as the seller’s
output choice triggering a reaction in rivals; previously in monopolistic competition
there was no reaction and this is because there are lots of sellers in that structure so
can’t react to every change. However with few large firms there is a reaction to change
in output.
4. Entry is blocked: no entry into market even in long run
- Cournot model specific assumptions:
1. 2 sellers A+B in a market: they are duopolists who choose the level of output they
produce (hence output is strategic variable) and make output decisions simultaneously
2. Further entry to the market is completely blocked
3. Firms produce homogeneous products; products which are identical
4. Market demand is P = a – Q ; a>0 and Q is total market output; this means that as firms
produce more the market price will go down and hence the demand curve is downward
sloping
- Due to us assuming the market is a duopoly in 1. The market demand is P = a – Qa – Qb
where Qa and Qb are output of firm A and B respectively
- We can use the Nash equilibrium concept to solve this game to see how firms behave under
these assumptions
- There is a Nash equilibrium when no firm wants to change its output holding the other firms
output level constant:
- Nash equilibrium made up of 2 output levels Qa* and Qb* which are A and B’s equilibrium
output levels such that
- Given A produces Qa*, B maximises profit by producing
Qb* and vice versa
- Both firms are playing their best responses in terms of
output choice while considering each other’s output
choices as part of the decision
- Cournot Nash Equilibrium Diagram (on left)
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller vibhavpandey. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $3.87. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
67474 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now