Cournot competition is an economic model wherein industries compete depending on the mass of produce they manufacture (Tirole 24). This name, Cournot, was derived from Antoine Augustin Cournot who was motivated after viewing duopoly rivalry in spring water industry. Cournot competition model is typically observed in cases of oligopoly or monopoly (Tirole 24).
The basic principle behind the model is that oligopolies boast elevated yield and lesser prices than monopolies, but lesser yield and higher prices than perfect competition. The model also requires that: there are different firms which produce the same product, each firm has market power, there is no cooperation between firms and the figure of firms is fixed.
A vital assumption of this model is that every firm aspires to capitalize on profits, founded on the anticipation that its own production decisions will not impact rival’s decisions (Tirole 24). Price is a universally recognized falling function of the entire output. Moreover the price functions are taken to be ordinary knowledge.
The price functions can be identical or unlike among firms. The market price is placed at a height which ensures that demand is same as the sum quantity produced by every firm (Powell 57). Every firm takes the amount laid down by its rivals, assesses its outstanding demand, and subsequently acts as a monopoly.
The fundamentals of this model need rivalry to be centered on the amount of a specific good produced. Generally, price goes down when more of a good is produced. However, this does not essentially apply to this model as duopolies or monopolies do not encounter demands from rivalry to decrease prices. Prices only reduce when outputs exceed demand, making the business not to produce more, and motivating rivals to act similarly.
In Cournot competition model, the goods produced are identical, cannot be stored and the costs are determined by the market. Products in this model are sold and distributed right away. This model is mostly applied on agricultural products such as cotton, rice and wheat (Powell 56).
Today, Cournot competition model is usually used in cases whereby businesses desire to maximize profits founded on the intensity of output. The rationale is to keep away from saturating the market so that the prices do not decrease and to guarantee production of adequate products so as to acquire the highest quantity of revenue.
Businesses make use of the sum production level of the market and gauge this alongside the demand so as to compute the much that it should yield. The dissimilar businesses will operate as a monopoly by applying an identical strategy.
Ineffectiveness transpires in a business where Cournot competition is present. The equilibrium cost becomes elevated than the marginal cost of production leading customers to pay beyond what they would in a case of perfect competition. Excesses are also present as there lacks downward demands for the business to decrease output. Collusions also can take place in businesses with Cournot competition.
Businesses possess an incentive to lift prices or decrease production so as to boost profit.
In conclusion, Cournot competition model can be applied in cases of oligopoly or monopoly. The model assumes that every firm aspires to capitalize on profits, founded on the anticipation that its own production decisions will not impact rival’s decisions. Today, Cournot competition model is usually used in cases whereby businesses desire to maximize profits founded on the intensity of output
Tirole, Jean. The Theory of Industrial Organization. London: Sage, 1988.
Powell, TC. European and North American Origins of Competitive Advantage. London: Emerald Publishing, 2010.