The Cournot Model

As 90 Output Bs Reaction Function As Reaction Function Bs Output

45

45

90

Lectures in Microeconomics-Charles W. Upton

Assumptions
Two firms A, and B produce widgets

The Cournot Model

Assumptions
Two firms A, and B produce widgets The industry demand function is D

The Cournot Model

Assumptions
Two firms A, and B produce widgets The industry demand function is D Firm A produces qA; firm B produces qB

The Cournot Model

Assumptions
Two firms A, and B produce widgets The industry demand function is D Firm A produces qA; firm B produces qB Firm A takes its demand function as D -qB

qb Da

The Cournot Model

Assumptions
Two firms A, and B produce widgets The industry demand function is D Firm A produces qA; firm B produces qB

An important assumption, the heart of the Cournot model. D qb Da Q

Firm A takes its demand function as D -qB

The Cournot Model

Solving As problem
Da D

The Cournot Model

Solving As problem
Da D
MR MC

The Cournot Model

Solving As problem
Da D
p*

MR

MC

qa*The Cournot Model

Symmetry
Just as Firm A is choosing qA to maximize profits, so too is Firm B choosing qB to maximize profits.

The Cournot Model

Symmetry
Just as Firm A is choosing qA to maximize profits, so too is Firm B choosing qB to maximize profits. If B changes its output, A will react by changing its output.

The Cournot Model

A Reaction Function
We do the mathematical approach first and then the graphical approach.

The Cournot Model

A Reaction Function
The industry demand function

Q = 100 2p.

The Cournot Model

A Reaction Function
The industry demand function Q = 100 2p. The inverse demand function is

P = 50 (1/2)Q

The Cournot Model

A Reaction Function
The industry demand function Q = 100 2p. The inverse demand function is P = 50 (1/2)Q As demand function is then

P = 50 (1/2)(qA+qB)
The Cournot Model

A Reaction Function
As demand function is then

P = 50 (1/2)(qA +qB)
The firms profits are

T = PqA 5qA

The Cournot Model

A Reaction Function
As demand function is then P = 50 (1/2)(qA +qB) The firms profits are

T = [50 (1/2)(qA +qB)]qA 5qA

The Cournot Model

A Reaction Function
T = [50 (1/2)(qA + qB)]qA 5qA

The Cournot Model

A Reaction Function
T = [50 (1/2)(qA + qB)]qA 5qA T = 50 qA(1/2) qA 2 (1/2)qBqA 5qA

The Cournot Model

A Reaction Function
T = [50 (1/2)(qA + qB)]qA 5qA T = 50 qA(1/2) qA 2 (1/2)qBqA 5qA

T = 45qA (1/2)qA2 (1/2)qBqA

The Cournot Model

A Reaction Function

1 2 1 T ! 45qa  qa  qa qb 2 2

The Cournot Model

A Reaction Function

1 2 1 T ! 45qa  qa  qa qb 2 2 dT 1 ! 45  qa  qb dqa 2
The Cournot Model

A Reaction Function

dT 1 ! 45  qa  qb ! 0 dqa 2 1 qa ! 45  qb 2
The Cournot Model

Symmetry
qA = 45 (1/2)qB There is a similar reaction function for B qB = 45 (1/2)qA

The Cournot Model

Solving for As Output

qA = 45 (1/2)qB qB = 45 (1/2)qA qA = 45 (1/2)[45 (1/2)qA]

The Cournot Model

Solving for As Output

qA = 45 (1/2)[45 (1/2)qA] qA = 22.5 + (1/4)qA

The Cournot Model

Solving for As Output

qA = 45 (1/2)[45 (1/2)qA] qA = 22.5 + (1/4)qA (3/4)qA = 22.5

The Cournot Model

Solving for As Output

qA = 45 (1/2)[45 (1/2)qA] qA = 22.5 + (1/4)qA (3/4)qA = 22.5 qA = (4/3)22.5

The Cournot Model

Solving for As Output

qA = 45 (1/2)[45 (1/2)qA] qA = 22.5 + (1/4)qA (3/4)qA = 22.5 qA = (4/3)22.5

qA = 30 qB = 30
The Cournot Model

A Graphical Approach
qA = 45 (1/2)qB
We want to use the reaction function to come to a graphical solution,

The Cournot Model

A Graphical Approach
qA = 45 (1/2)qB When B produces nothing A should react by producing the monopoly output (45).

The Cournot Model

A Graphical Approach
qA = 45 (1/2)qB
When B produces nothing A should react by producing the monopoly output (45).

When B produces the output of the competitive industry (90), A should react by producing nothing.
The Cournot Model

A Graphical Approach
qA = 45 (1/2)qB When B produces nothing A should react by producing the monopoly output (45). When B produces the output of the competitive industry (90), A should react by producing nothing.

Similar rules apply for Bs reactions.

The Cournot Model

Graphing the Reaction Function

As Output

Bs Output
The Cournot Model

Graphing the Reaction Function

As 90 Output

45

If B produces nothing, A acts like a monopoly

If B produces the competitive output, A produces nothing.

Bs Output

0
The Cournot Model

90

Graphing the Reaction Function

As Output

45

As Reaction Function Bs Output

The Cournot Model

90

Graphing the Reaction Function

As 90 Output

If A produces the competitive output, B produces nothing. If A produces nothing, B acts like a monopoly.
As Reaction Function Bs Output

45

45 The Cournot Model

90

Graphing the Reaction Function

As 90 Output Bs Reaction Function As Reaction Function Bs Output

45

45Cournot Model 90 The

Graphing the Reaction Function

As 90 Output

45

If A and B are off their reaction functions, they react and change output. Here B expands, A contracts.
Bs Output

45 Model The Cournot

90

Graphing the Reaction Function

As Output

Bs Output
The Cournot Model

Graphing the Reaction Function

As Output

If A is here, B wants to be here

Bs Output
The Cournot Model

Graphing the Reaction Function

As Output

If B is here, A wants to be here

Bs Output
The Cournot Model

Equilibrium
As Output Bs Reaction Function As Reaction Function Bs Output
The Cournot Model

The Basic Steps

Plot the reaction functions
If B produces nothing, A behaves like a monopoly If B produces competitive output, A produces nothing

Solve for their intersection

The Cournot Model

End

2003 Charles W. Upton

The Cournot Model