•
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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