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Unformatted text preview: Cournot Duopoly In 1838, Augustin Cournot introduced a simple model of duopolies that remains the standard model for oligopolistic competition. In addition to the assumptions stated above, the Cournot duopoly model relies on the following: 1. Each firm chooses a quantity to produce. 2. All firms make this choice simultaneously. 3. The model is restricted to a one-stage game. Firms choose their quantities only once. 4. The cost structures of the firms are public information. In the Cournot model, the strategic variable is the output quantity. Each firm decides how much of a good to produce. Both firms know the market demand curve, and each firm knows the cost structures of the other firm. The essence of the model is this: each firm takes the other firm's choice of output level as fixed and then sets its own production quantities. The best way to explain the Cournot model is by walking through examples. Before we begin, we will define the reaction curve, the key to understanding the Cournot model (and elementary...
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- Fall '08