The Basics
- Simple definition: An oligopoly model where firms compete by choosing output quantities simultaneously, and price adjusts to clear the market.
- Core idea: Firms decide how much to produce, not what price to charge; the market determines price from total output.
- Think of it as: Each firm picks a production level, and the resulting total output determines price.
What It Actually Means
Augustin Cournot’s 1838 model (predating game theory) has firms choosing quantities. Each firm’s profit depends on total output (hence price) and its own costs. Each chooses output assuming rivals’ outputs fixed. Equilibrium occurs where each firm’s output is the best response to others – Cournot-Nash equilibrium. Outcomes lie between monopoly (low output, high price) and perfect competition (high output, low price). More firms = more competitive outcome.
Example
Two Pakistani cement firms choose production. If both produce high, price crashes. If both low, price high. Each balances: producing more increases market share, but lowers price. Cournot equilibrium finds stable quantities where neither wants to change.
Why It Matters
Cournot models realistic quantity competition in industries where capacity decisions matter. It’s foundational for industrial organization and competition policy.
Don’t Confuse With
Bertrand Competition – Bertrand assumes price competition; Cournot assumes quantity competition.
See also
Oligopoly • Bertrand Competition • Stackelberg Model • Nash Equilibrium • Reaction Functions
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