Chapter 11 The World of Oligopoly: Preliminaries to Successful Entry

Figure 11.1 Marginal and Average Cost Curves for a Firm That Produces Gadgets

Figure 11.2 The Profit-Maximizing Output for the Gadget Monopoly

Cournot Model of a Duopoly Assumptions: Two Firms: Firm 1 Cost Function: C(q 1 ) and Firm 2 Cost Function: C(q 2 ) Market Demand: p = A – bq total = A – b(q 1 + q 2 ) Questions: What will be the equilibrium output levels of the two duopolists? What price will prevail in the market? What profits will each firm make?

Cournot Conjecture (zero conjectural variation) Additional Assumption: When making the output level decision, a firm assumes that the other firm will not change its own output choice in response. Profit Maximization problem is now to maximize: Firm 1:  1 = (A-b(q 1 + q 2 ))*q 1 – C(q 1 ) = ((A-bq 2 )-bq 1 )*q 1 – C(q 1 ) Firm 1:  2 = (A-b(q 1 + q 2 ))*q 2 – C(q 2 ) = ((A-bq 1 )-bq 2 )*q 2 – C(q 2 ) Subject to the assumed fixed quantity choice of the other firm.

Figure 11.3 The Optimal Output for a Gadget Duopolist

Figure 11.4 The Reaction (Best-Response) Function for Gadget Duopolist 1

Figure 11.5 The Reaction (Best-Response) Function for Gadget Duopolist 2

Figure 11.7 The Reaction Function Equilibrium (Nash Equilibrium) for the Gadget Duopoly

Figure 11.8 An Unstable Cournot Equilibrium

Figure The Monopoly Solution with Zero Marginal Costs