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
Industrial Organization in Context
Cournot
29 August

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.

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
Best response functions
°
We begin the task of °nding equilibrium outputs by
characterizing the output that will maximize a °rm²s pro°t
for an arbitrary output level of the other °rm.
°

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- Fall '08
- MARTIN,S
- Economics, Game Theory, Oligopoly, Supply And Demand, best response, Cournot