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The Cournot Model is an economic model that attempts to predict the behavior of two businesses that make up a given market. This theory was first posited by French economic theorist Antoine Augustin Cournot in the 19th century after he observed the competition between two spring water companies. In the Cournot Model, the variable that exists between two companies that form a duopoly of a specific market is their output level. These companies will adjust their levels of output until they reach a point where they can lower prices while still maximizing profits.
Antoine Augustin Cournot was a French philosopher, economist, and mathematician who published his most famous work, the Recherches, which is French for elegant or exotic, in 1838. Cournot believed in the use of mathematics to help shed light on social science issues that affected daily life. The part of his work that gained the most notice was his model for how companies that form a duopoly are expected to perform, a model that became known as the Cournot Model.
Using the Cournot Model is a way to understand not just duopolies, but also oligopolies, which occur when there are just a few firms in a particular market. A duopoly is a specific oligopoly in which just two companies produce the exact same goods for a single market. In addition, these two separate companies must compete with each other and not collude to form a cartel.
With these characteristics in place, the Cournot Model also makes several assumptions about the state of this duopoly. First of all, the cost structures of the competing firms are known by each. Second, the two companies choose how much quantity to produce of whatever they are making, and they make that choice simultaneously. Knowing all of this, the lone variable in the equation is the amount of output each company produces, which means that they must strategize in terms of that output.
When the mathematics of the Cournot Model are calculated, it reaches the conclusion that a duopoly's characteristics will fall somewhere in between those of a monopoly and those of a market that includes many firms and forms perfect competition. Although the duopoly does not achieve the low prices of perfect competition, it allows for some improvement for consumers from a monopoly, where a single company can disregard cost control. As the two companies adjust their output levels in reaction to each other, these effective responses help to achieve a balance within the industry.