Core assumption firms choose assuming quantities of

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Core assumption: firms choose assuming quantities of rivals as given (Cournot conjecture) Result: Firms price above the marginal cost ¾ For our numbers: p=5, MC=c=1 Easy to show ¾ More firms Æ price closer to MC + less profits ¾ As N Æ infinity, p=MC; competitive market in the limit Main criticisms of the Cournot model 1. Timing seems off: Decisions of firm are not simultaneous. Æ Stackelberg model of oligopoly 2. Firms choose prices (not quantities) Æ Bertrand model Chapter 13 –Oligopoly Slide 12 Continuous Strategies - Stackelberg Sequential Cournot Game An industry leader (first mover) chooses her quantity A follower (second mover) then chooses her quantity The market price is determined (as in the Cournot game) by p=a-b(Q 1 +Q 2 ) Marginal cost of production: c
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