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OLIGPOLY (II) 1 Outline Cournot model Notes on Cournot and Bertrand Practice 2 Outline Cournot model Notes on Cournot and Bertrand Practice 3 Cournot model Players: two firms produce identical products. Each has constant marginal cost MC = c Strategies and rules: - Firms set output (capacity levels) simultaneously - Market price is a function of total output (capacity level): p = P ( q 1 + q 2 ) where P ( · ) is the inverse demand curve Referred to as Cournot model after its inventor 4
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Best response mapping Suppose Firm 2 produces zero output. Then, for practical purposes, it’s as if Firm 1 were a monopolist Hence, best response to q 2 = 0 is q 1 = q m , i.e., q * 1 (0) = q m Suppose Firm 1 produces q 2 = q c , where q c corresponds to the competitive level that is, MC = P ( q c ). Then, any positive output level set by Firm 1 leads to p < MC Hence, best response to q 2 = q c is q 1 = 0,, i.e., q * 1 ( q c ) = 0 It can be shown that, for intermediate values of q 2 , the optimal q 1 is the intermediate value of the above two extreme values 5
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  • Fall '15
  • ANDREWPAIZIS
  • Economics, Bertrand, Cournot

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