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lect7n - Cournot Model Suppose now that firms make output...

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Unformatted text preview: Cournot Model Suppose now that firms make output decisions simultaneously before prices are chosen. Firms know that for each level of output chosen q 1 , q 2 , equilibrium prices will be P ( q 1 + q 2 ). This means profit for firm i is π i = q i ( P ( q 1 + q 2 )- c ) where c is the constant marginal cost. This is the Cournot Model. Firms simultaneously choose the output they want to produce, and then the market price is set at the level at which demand equals total quantity produced. Cournot Model As before, we’ll solve for the equilibrium outcome in two steps. First we’ll derive the firm’s optimal choice given its conjecture on what the other firm does (reaction curve). Next we put both reaction firms together and find a mutually consistent set of actions and conjectures. To derive the optimal output in the first stage, we first suppose Firm 1 believes Firm 2 will produce q 2 . The demand curve facing Firm 1 is the residual demand curve d 1 ( q 2 )). Cournot Model Facing this residual demand curve, Firm 1 the optimal output...
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lect7n - Cournot Model Suppose now that firms make output...

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