Cournot Duopoly.ppt

Cournot Duopoly Here we study a special type of market structure - two firms. Say we have a market where the demand in the market is P = 100 - 2Q (graph on next slide). If we had only one firm in the market - a monopoly - and if the firm had a constant MC = 10, then we know the profit maximizing firm would find the Q where MR = MC and set the Q back into the demand curve to get the price. Let抯 do this. MR = 100 - 4Q = 10 = MC, or Q = 22.5, and then P = 55. If MC is constant at 10, then the cost of each unit added is 10. Part of total cost then is MC times Q. For what we do here we will only have this part of TC and thus profit here is 55(22.5) - 10(22.5) = 1012.5 MC=10 P=100-2Q MR=100-4Q Pc=10 Pm=55 Qm = 22.5 Qc = 45 Now, since price is driven to MC in a competitive market with many firms, Pc = MC = 10 and the market output would be (100 - 2Q = 10) Q = 45. The overall profit across firms would be 10(45) - 10(45) = 0. Now, let抯 consider a model thought up by a guy named Cournot (rhymes with tour go). Cournot said consider only two firms selling in a market. The way that each firm understands the market is that each will pick its own output level. Then when the other firm抯 output level is added in the price will determined from the demand curve. Now, if there are two firms in the market, the market demand would be served by both firms and we might think of the demand as P = 100 - 2Q = 100 - 2(q1 + q2), where q1 q2 represent the output of each firm. Each firm wants to maximize its own profit. Again, each firm will pick a level of output and when added together will determine the market price. The profit for each firm will be firm 1 Pq1 - mcq1 firm 2 Pq2 - mcq2. As an example, if both make 1 unit (and MC = 10 for both), then P = 100 - 2(1+1) = 96, firm 1 profit = 96(1)-10(1) = 86 and firm 2 profit = 96(1)-10(1)=86. On the next slide I put a game theory matrix with this outcome and you will work out other outcomes. In the table we