461F13OligICournot - Q uantitySetting Oligopoly Quantitysetting duopoly Equilibrium dened Residual demand Residual marginal revenue Best response

Quantity- Setting Oligopoly Quantity- setting duopoly Equilibrium de°ned Residual demand Residual marginal revenue Best response function Best response curve diagram Equilibrium Cournot, cost di/erences BRC diagram, cost di/erences Cournot equilibrium, cost di/erences Her°ndahl index Welfare, Cournot duopoly, cost di/erences Many °rms Summary Cournot (1838): the basic oligopoly model Two suppliers: the smallest possible change from one supplier Cournot analyzed a market supplied by two producers of a standardized product ± mineral water drawn from a common underground source. ° each °rm knows the market demand curve ° the two °rms have identical costs ° each °rm knows that the other °rm knows as much about the market as it does. ° Each °rm picks its own output to maximize its own pro°t, knowing that the other °rm acts in the same way and with the same information. After looking at Cournot²s model of quantity-setting oligopoly, we will work out a model in which °rms set prices, not output levels. We start with the model of quantity-setting °rms because it is easier.

Quantity-SettingHow much will the °rms produce,and at what price will the productsell? Oligopoly Quantity- setting duopoly Equilibrium de°ned Residual demand Residual marginal revenue Best response function Best response curve diagram Equilibrium Cournot, cost di/erences BRC diagram, cost di/erences Cournot equilibrium, cost di/erences Her°ndahl index Welfare, Cournot duopoly, cost di/erences Many °rms Summary Noncooperative equilibrium ° Cournot²s equilibrium concept was an anticipation of that developed by John Nash in 1950, and is often referred to in economics as Cournot-Nash or noncooperative equilibrium. ° What we require of an equilibrium pair of outputs is that each °rm²s equilibrium output maximize its pro°t, given the equilibrium output of the other °rm. ° For such an output pair, each °rm is making as large a pro°t as it possibly can, given what the other °rm does. ° In view of Cournot²s assumption that each °rm seeks to maximize its own pro°t, neither °rm would wish to alter its own part of such an output pair.