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Introduction To Cournot Competition

Author: Carrol Rogers
by Carrol Rogers
Posted: Jun 10, 2014

Introduction:

Economists study many a vast spectrum of market structures so that they understand how markets work. There are two extremes to this spectrum. One end marks Competitive markets that are perfect and consist of small sellers and buyer in large numbers. The other end is marked by monopolies, which are markets consisting of a single seller. These two extremes cover lots of other markets which are present in between.

In the industrial organization field, most study is conducted on imperfect competition that exists within the market structures that lie in between the two above mentioned extremes. Cournot Competition is one such example.

Cournot Competition:

This type of competition was named after the famous French Mathematician Antoine Cournot who observed the duoply competition and was inspired to propose the Cournot economic model in 1838.

Cournot competition is used in describing the structure of an industry in which there is competition between the companies based on the output produced. This model has the following features:

  • There are more than one firms and all produce the same product.
  • There is no cooperation in between the firms
  • There are a fixed number of firms
  • Competition in between the firms is with respect to quantities.
  • All firms have a say in the price on the goods.

Assumptions of Cournot Model:

The basic Cournot model version is studied with respect to duopoly which resembles a market consisting of two sellers. Hence, this model can be extended to house any other number of firms that are competing. The Cournot model is based on two important assumptions:

  • The first assumption states that all the firms or companies involved are selling the same products. This means there is no differentiation in the products sold.

This is an important assumption since it states that the whole market will decide on one fixed selling price at which all the companies’ products will be sold. The individual firms cannot decide separately and have to sell their products at the price decided by the market. The only decision that is left up to them is the amount of output to be produced. If they want to make profit, they should produce more than what the other companies do.

  • Second Assumption states that the decisions on how much output to deliver is taken by all the firms at one particular time. This assumption seems unrealistic when taken literally. However, it seems relevant that every firm decides on its product before it fids out the output of the other firms. This is considered as a fair assumption by many markets.

Conclusion:

Even though the Cournot model is a duopoly, it can be applied to multiple firms and still remains unchanged. This is a very efficient model that explains the working of different markets.

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Author: Carrol Rogers

Carrol Rogers

Member since: Mar 31, 2014
Published articles: 33

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