Mathematical Illustration of the Cournot Competition
Journal for Advanced Research in Commerce and Management Studies, 2015, Volume 2, Issue 2, pp. 7-18, ISSN: 2394-837X
11 Pages Posted: 3 Oct 2014 Last revised: 7 Oct 2016
Date Written: October 1, 2014
Abstract
As many pupil find difficult to understand the initial explanations of duopoly (two firms in a market), this paper attempts to provide a simplified mathematical illustration with a numeric example about the basic explanation of duopoly presented by Antoine Augustin Cournot (1801-1877). This explanation considers two situations: free entry and blocked entry, in a hypothetical context with five different scenarios. The results of these scenarios in terms of quantities, prices and profits of two firms are initially presented for comparison. In the two situations, a firm should decide on how to utilize the market environment to maximize profit as its optimum. Since two firms are potentially in action, utilising the situations by each firm has been analysed. The given situational and scenario analyses reveal that free entry situation mostly benefits both firms to economically and efficiently operate in the market, as it brings asymmetrical sharing of market and profit by both firms in the long run.
Keywords: Cournot, duopoly, monopoly, oligopoly, incumbent, free entry, blocked entry
JEL Classification: A22, D42, D43
Suggested Citation: Suggested Citation