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What is the Cournot Model?
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.
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Discussion Comments
No, because if you raise your prices your customers will just go buy from the other guy.
We learned about the Cournot Model of Oligopoly in economics class as part of game theory. I had heard about game theory in political science courses before but had no idea that it's a part of economics as well.
When I think about it though, it makes sense. Game theory is where someone's action affects someone else's right? So when company A produces an x amount of goods, it impacts what company B produces. This situation is the game and what each company plans to do is their strategy. Makes sense!
@feruze-- I don't think that the model requires that at all. Price is based on something called the "demand elasticity" in economics.
What that means is that customers have a certain sensitivity to price. If they have high sensitivity, they will buy less when the prices go up and the companies will lose money. If customers have low sensitivity, it means that they will pretty much buy the same amount whether the price goes up or down.
The Cournot Model accounts for that. The point the model is trying to make is that whether or not customers have low or high sensitivity, companies in a duopoly are always going to end up producing the same amount of goods.
In this model, why is it assumed that the two companies will reduce their prices?
If I were those two companies, I would increase my prices to the point where I don't lose customers because there is only two options for that product on the market. The customer has to either by my product or the other company's product or not buy at all. Wouldn't they make more money this way?
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