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Unformatted text preview: de with potential competitors against consumers. This choice provides the basis for the theoretical and practical distinction between noncollusive and collusive oligopolies. Noncollusive Oligopoly: Cournot's Duopoly Model (MC=0) Cournot considered the simple case of two identical mineral water springs that stand side by side and are owned by two firms, A and B. In this model, production costs are limited to the fixed costs of digging the wells, since it is assumed that the consumers fetch the water themselves and provide their own containers. It follows that both variable costs and marginal costs are zero, since the production of one extra unit of water requires no additional expense beyond digging the well. Cournot's analysis of duopoly is built on the assumption that both firms aim at profit maximization so that they will both produce the level of output for which MR=MC. Since in the case of the two wells we have a MC=0, the profit maximization condition becomes MR=0. We should recall that this condition is fulfilled at the midpoint of a straight line demand curve, where the quantity sold equals one half of the market.
P D' MRA 0 QA = 0.5 A MRB B QB = 0.25 D 1 X 283 It is assumed that initially firm A is the only producer and seller of mineral water. Firm A maximizes profits where MRA = 0, by producing OA = 0.5 (one half of the quantity that consumers would be willing to drink...according to their demand curve, if the price was zero). A second behavioural assumption of Cournot's model is that each producer believes that the other will not change its output and therefore takes the other producer's output as given. Accordingly, when producer B enters the market, it assumes that its effective demand curve is D'D and that the corresponding MR curve is MRB. Producer B thus maximizes profits where MRB = 0 or AB = 0.25 (1/4 of the market demand when P = 0). Is this a stable final equilibrium point? This situation, where A takes half of the market and B takes one quarter of the market,...
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This note was uploaded on 05/25/2010 for the course ECON 301 taught by Professor Sning during the Spring '10 term at University of Warsaw.
 Spring '10
 sning
 Economics

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