Duopoly terms. The quantitative Cournot duopoly model. Behavior of the monopolist firm in the short and long term
Cournot model, general information
Short term
Conclusions on the model
Cournot equilibrium
The main feature of duopoly models (for simplicity, there are only 2 firms on the market) is that the revenue and, therefore, the profit that the firm will receive depends not only on its decisions, but also on the decisions of the competing firm, which is also interested in maximizing its profits. ...
Cournot model
There are many models of oligopoly, and none of them can be considered universal; nevertheless, they explain the general logic of the behavior of firms in this market. The first duopoly model was proposed by the French economist Augustin Cournot as early as 1838.
Cournot's model analyzes the behavior of a duopolist firm on the assumption that it knows the volume of output that its only competitor has already chosen for itself. The task of the firm is to determine its own size of production, in accordance with the competitor's decision as a given. In fig. 9.2 shows how the firm would behave under such conditions.
Rice. 9.2.Short-term behavior of a duopolist firm
Short term
For simplicity, it was assumed that both duopolists are exactly the same, no different companies. Second, it was assumed that the marginal costs of both firms are constant: the MC curve runs strictly horizontally.
Let us assume at the outset that Firm # 1 is well aware that the competitor is not going to produce anything at all. In this case, firm # 1 is actually a monopoly. The demand curve for its products (D0) will therefore coincide with the demand curve for the entire industry. Accordingly, the marginal revenue curve will take a certain position (MR0). Using the usual rule of equality of marginal income and marginal costs MC = MR, firm No. 1 will establish the optimal production volume for itself 50 units.
And if the firm number 1 becomes aware that its competitor himself intends to release 50 units. products? At first glance, it may seem that by doing so it will exhaust the entire volume of demand and force firm No. 1 to abandon production. However, it is not. If firm No. 1 sets the price P1 for its products, then there really will be no demand for it: the 50 units that the market is ready to accept at this price have already been supplied by firm No. 2. But if firm No. 1 sets the price P2, then the total demand market will be 75 units. (see industry demand curve D0). Since firm No. 2 offers only 50 units, then the share of firm No. 1 will remain 25 units. If the price is lowered to P3, then, repeating similar reasoning, we can establish that the market demand for the products of firm No. 1 will be 50 units.
It is easy to understand that looking through different possible price levels, we will receive different levels of market demand for the products of firm No. 1. In other words, a new demand curve D1 and, accordingly, a new curve of marginal income MR1 will form for the products of firm No. 1. Using the MC = MR rule again, a new optimal production volume of 25 units can be determined.
Conclusions of the Cournot model
Production volume in conditions of oligopoly
Under an oligopoly, the volume of production is greater than the level that would have been established under a pure monopoly, but less than it would have been under perfect competition.
QM Indeed, our two firms produce 75 units in total, while the monopoly would produce only 50 units. And with perfect competition, the output would be 100 units. Prices in an oligopoly In turn, prices under an oligopoly are lower than monopolistic ones, but they exceed competitive ones: PM> Polig> PC. The graph clearly shows that the price set by firm No. 1 and which firm No. 2 will have to support if it wants to sell its 50 units. production, will be established at the level of P2. Indeed, only at this price level the market will be able to absorb all 75 units issued by both firms. And the price of P2 is below the monopoly price of P1 and above the competitive level of P3. Oligopolistic profits The total oligopolistic profits of both duopolists will be lower than the profits that a single monopoly firm would have received in the same market, although the trend towards positive economic profits will continue. PM> Polig> 0 General conclusion Each level of output of one of the duopolists corresponds to a specific demand curve for the products of the second duopolist. In other words, for any oligopolist, the market volume is not a constant value, but directly depends on the decisions of competitors. Cournot equilibrium The level of production set by the company based on the existing size of the competitor's production each time turns out to be such that it forces the latter to reconsider it. This causes a new adjustment in the volume of production of the first firm, which in turn again changes the plans of the second, that is, the situation is unstable, non-equilibrium. However, there is also a point of stable equilibrium - this is the point of intersection of the response curves of both firms (point O on the graph). In our example, firm # 1 produces 33.3 units, assuming that the competitor will produce the same amount. And for the latter, the issue is 33.3 units. really is optimal. Each of the firms produces a volume of products that maximizes its profits for a given volume of production of a competitor. It is not profitable for any of the firms to change the volume of production, therefore, equilibrium is stable... In theory, it was called the Cournot equilibrium. Under Cournot equilibrium
we understand a combination of the output volumes of each of the firms in which none of them has incentives to change their decision: the profit of each firm is maximal provided that the competitor maintains the given output. Or, to put it another way: at the Cournot equilibrium point, the expected by competitors of the output of any of the firms coincides with the actual and at the same time is optimal. The simplest oligopolistic situation is when only two competing firms operate on the market. The main feature of duopoly models is that the revenue and profit that a firm will receive depends not only on its decisions, but also on the decisions of a competing firm that is interested in maximizing its profits. The first model of duopoly was proposed by the French economist Cournot in 1838. Cournot's model analyzes the behavior of a duopolist firm on the assumption that it knows the volume of output that its only competitor has already chosen for itself. The task of the firm is to determine its own size of production. Additional simplifications are made in the model: both duopolists are exactly the same, the marginal costs of both firms are constant (the MC curve runs strictly horizontally). Suppose that firm 1 knows that the competitor is not going to produce anything. Firm 1 is practically a monopoly. The demand curve for its products (D 0) coincides with the demand curve for the entire industry. Marginal revenue curve MR 0. According to the rule of equality of marginal income and marginal costs MC = MR, firm 1 will set the optimal production volume for itself (50 units). Firm 2 intends to produce 50 units of products. If firm 1 sets the price P 1 for its products, then there will be no demand for it. This price has already been set by firm 2. But if firm 1 sets the price P 2, then the total market demand will be 75 units. Since firm 2 offers 50 units, then the share of firm 1 will remain 25 units. If the price is lowered to P 3, then the market demand for the products of firm 1 will be 50 units. Sorting out different possible price levels, one can obtain different market needs for the products of firm 1, i.e. for the products of firm 1, a new demand curve D 1 and a new marginal income curve MR 1 will form. Using the rule MC = MR, a new optimal production volume can be determined. Short term. The graph reflects the process of choosing the optimal volume of production by the monopolist and the process of establishing market equilibrium in the monopolized industry. The volume of production will be established at the level Q m, corresponding to the point of intersection of the curves of marginal income and marginal costs (MC = MR). The projection of this point onto the demand curve (point O m) will also set the equilibrium price P m. Point O m reflects not only the price and quantitative optimum for the firm, but also becomes the point of the industry-wide market equilibrium under monopoly conditions. Under a monopoly, the degree of market imperfection reaches its maximum. O 1) strong underproduction of goods in comparison with the competitive level (QM< 2) significant overpricing in comparison with the value that would have developed under perfect competition (PM >> PO) This happens because the complete absence of competitors in the market allows the monopolist to limit supply so sharply that the price level rises to an economically justified (from the monopolist's point of view) maximum. However, it is worth noting that the monopoly charges the highest possible price for it, which is simultaneously high enough to maximize profits, but low enough to induce consumers to purchase the maximizing output. Long term. The monopolist has no supply curve. The monopolist's decision to change the scale of production depends only on the relationship between the market demand curves and long-run average costs. The monopolist himself determines how much output in the industry to produce => he can vary the supply in order to maximize profits. NS The second graph: market demand changes (buyers buy more) => new curves are formed => new price => huge profits => the company goes into the long run if it can set a price there higher than average long-term costs. Students, graduate students, young scientists who use the knowledge base in their studies and work will be very grateful to you. Posted on http://www.allbest.ru/ ESSAY FIRM CONDUCT IN DUOPOLY CONDITIONS Duopoly (from Latin: two and Greek: I sell) is a situation in which there are only two sellers of a certain product, not related to each other by a monopoly agreement on prices, sales markets, quotas, etc. This situation was theoretically considered A. Cournot in the work "Investigation of the mathematical principles of the theory of wealth" (1838). Cournot's theory is based on competition and is based on the fact that buyers announce prices and sellers adjust their output to these prices. Each duopolist estimates the demand function for the product and then sets the quantity to be sold, assuming the competitor's output remains constant. According to Cournot, in terms of output, the duopoly occupies an intermediate position between full monopoly and free competition: compared with a monopoly, output here is somewhat higher, and compared with pure competition - less. Initial conditions and the main task of the model There are two similar firms operating on the market (a duopoly situation), each of which owns a mineral water source that it can develop at the same cost. For simplicity, they are taken equal to zero. The companies sell mineral water on the market. Market demand is known and has the form of a linear function: Aggregate production of two firms: Firm behavior in a duopoly environment. Cournot model Each firm seeks to maximize profits, proceeding from the invariability of the volume of output of the competitor, regardless of what volume it chooses (in other words, the volume of output of the competitor is taken as a given value). For example, if firm 1 assumes that the possible output of firm 2 is zero (i.e., it is the only producer and the demand for its products coincides with market demand), then it produces one volume at the optimum point. If the possible output of firm 2 is greater, then firm 1 will adjust its output based on the residual demand (market demand minus the demand for the products of firm 2), i.e. will produce slightly less at the optimum point. Finally, if firm 1 believes that its competitor covers 100% of the market demand, its optimal output will be zero. Thus, the optimal output of firm 1 will change depending on how, in its opinion, the output of firm 2 will grow. The main task of the model is to determine at what volume of output both firms reach equilibrium. The simplest oligopolistic situation is when only two competing firms operate on the market. The main feature of duopoly models is that the revenue and profit that a firm will receive depends not only on its decisions, but also on the decisions of a competing firm that is interested in maximizing its profits. The first model of duopoly was proposed by the French economist Cournot in 1838. Cournot's model analyzes the behavior of a duopolist firm on the assumption that it knows the volume of output that its only competitor has already chosen for itself. The task of the firm is to determine its own size of production. Additional simplifications are made in the model: both duopolists are exactly the same, the marginal costs of both firms are constant (the MC curve runs strictly horizontally). duopoly seller commodity equilibrium The simplest oligopolistic situation is when only two competing firms operate on the market. The main feature of duopoly models is that the revenue and profit that a firm will receive depends not only on its decisions, but also on the decisions of a competing firm that is interested in maximizing its profits. The first model of duopoly was proposed by the French economist Cournot in 1838. Cournot's model analyzes the behavior of a duopolist firm on the assumption that it knows the volume of output that its only competitor has already chosen for itself. The task of the firm is to determine its own size of production. Additional simplifications are made in the model: both duopolists are exactly the same, the marginal costs of both firms are constant (the MC curve runs strictly horizontally). Suppose that firm 1 knows that the competitor is not going to produce anything. Firm 1 is practically a monopoly. The demand curve for its products (D0) coincides with the demand curve for the entire industry. Marginal revenue curve MR0. According to the rule of equality of marginal income and marginal costs MC = MR, firm 1 will set the optimal production volume for itself (50 units). Firm 2 intends to produce 50 units of products. If firm 1 sets the price P1 for its products, then there will be no demand for it. This price has already been set by firm 2. But if firm 1 sets the price P2, then the total market demand will be 75 units. Since firm 2 offers 50 units, then the share of firm 1 will remain 25 units. If the price is lowered to P3, then the market demand for the products of firm 1 will be 50 units. Sorting out different possible price levels, one can obtain different market needs for the products of firm 1, i.e. for the products of firm 1, a new demand curve D1 and a new marginal income curve MR1 will form. Using the rule MC = MR, a new optimal production volume can be determined Bibliography 1. Blaug M. Theory of duopoly // Economic thought in retrospect = Economic Theory in Retrospect. - M .: Delo, 1994 .-- S. 296-297. - XVII, 627 p. - ISBN 5-86461-151-4 2. Duopoly / Vasilchuk Y. A. // Debtor - Eucalyptus. - M.: Soviet encyclopedia, 1972. - (Great Soviet encyclopedia: [in 30 volumes] / chief editor A.M. Prokhorov; 1969-1978, vol. 8) Posted on Allbest.ru The theory of public spending P.A. Samuelson: essence and content, principles and directions of their practical application at the present stage. Oligopoly as a market situation in which several large firms dominate an industry, the concept of a duopoly. test, added 08/15/2013 Characteristics of the main models of the economy. Equilibrium position of a competitive firm. Methods of non-price competition (methods of product differentiation). Types of oligopolistic associations. Imperfect Competition Markets: Monopsony, Bilateral Monopoly, Duopoly. presentation added on 04/23/2014 Types of uncooperative behavioral strategies. Cournot duopoly equilibrium. Bertrand's paradox. The interval of price fluctuations according to the Edgewart model. Impact of power limitations on price fluctuations during a war. Equilibrium issues of duopolists according to Stackelberg. presentation added on 04/15/2012 Study of the main pricing models in the conditions of cooperative and non-cooperative oligopoly. Cartel model, price leadership. Duopoly model and Stackelberg model, broken demand curve. Efficiency and examples of oligopoly in the modern Russian Federation. term paper added on 05/08/2015 Methods for determining market equilibrium: graphical, tabular and analytical. Essence and description of the price mechanism. Methods for calculating the deficit and surplus of goods. Market equilibrium as a market situation in which the volume of demand is equal to the volume of supply. presentation added 11/17/2013 Features of determining the level of GDP and national income in the framework of the classical general equilibrium model. Distribution of income between employees and owners of firms. Product purchase volume. Tools for achieving general economic equilibrium. report added 03/25/2012 Research of oligopoly as a market model. Struggle for market power and basic models of oligopolistic pricing. Leadership in prices. Study of the problems of mergers of firms-oligopolists. Game theory. Equilibrium in the oligopoly market. Cournot duopoly model. term paper added 12/25/2015 The essence of monopoly, the history of their origin, forms and types, profit maximization. Sources of monopoly power. Interaction between firms. The monopoly makes a decision on the volume of output and the price of goods. State policy in relation to monopolies. term paper, added 03/01/2002 Essence, theoretical foundations and conditions for the emergence of a market of perfect competition. The behavior of the firm under these conditions. Market structure models and conditions for maximizing the profit of a competitive firm. Equilibrium of the firm in the short and long run. term paper, added 02/10/2009 Equilibrium of the firm in the short run. Classification of firms in a short-term equilibrium. The position of a competitive firm in the market. Maximizing sales revenue. Determination of the marginal rate of substitution of capital for labor. The rule of profit and cost. Duopoly.
35. The behavior of the monopolist firm in the short and long term.
This is particularly evident in the fact that the typical consequences of imperfect competition affect this market with particular force.
First graph: market demand does not change, then the monopolist goes into the long-term period if the price is higher than the average long-term costs.Send your good work in the knowledge base is simple. Use the form below
Similar documents
It is better to understand the patterns of a firm's behavior in an oligopolistic market by analyzing a duopoly, that is, the simplest oligopolistic situation when only two competing firms operate on the market. The main feature of the duopoly models
consists in the fact that the revenue and, therefore, the profit that the firm will receive depends not only on its decisions, but also on the decisions of the competing firm, which is also interested in maximizing its profits. The decision-making process in a duopolistic market is when the player searches for the strongest answers to his opponent's possible moves.
Cournot model.
There are many models of oligopoly, and none of them can be considered universal; nevertheless, they explain the general logic of the behavior of firms in this market. The first duopoly model was proposed by the French economist Augustin Cournot as early as 1838.
Cournot's model analyzes the behavior of a duopolist firm on the assumption that it knows the volume of output that its only competitor has already chosen for itself. The task of the firm is to determine its own size of production, in accordance with the competitor's decision as a given. In fig. 9.2 shows how the firm would behave under such conditions.
Rice. 9.2. Short-term behavior of a duopolist firm
Short term
To keep the graph simple, we made two additional simplifications. First, they accepted that both duopolists are exactly the same, no different companies. Second, it was assumed that the marginal costs of both firms are constant: the MC curve runs strictly horizontally.
Let us assume at the outset that Firm # 1 is well aware that the competitor is not going to produce anything at all. In this case, firm # 1 is actually a monopoly. The demand curve for its products (D 0) will therefore coincide with the demand curve for the entire industry. Accordingly, the marginal income curve will take a certain position (MR 0). Using the usual rule of equality of marginal income and marginal costs MC = MR, firm No. 1 will establish the optimal production volume for itself (in the case shown in the graph ¾ 50 units) and the price level (P 1).
And if the firm number 1 becomes aware that its competitor himself intends to release 50 units. products at a price of P 1? At first glance, it may seem that by doing so it will exhaust the entire volume of demand and force firm No. 1 to abandon production. However, it is not. If firm No. 1 sets the price P 1 for its products, then there really will be no demand for it: the 50 units that the market is ready to accept at this price have already been supplied by firm No. 2. But if firm No. 1 sets the price P 2, then the total market demand will be 75 units. (see the demand curve of the industry D 0). Since firm No. 2 offers only 50 units, then the share of firm No. 1 will remain 25 units. (75-50 = 25). If the price is lowered to P 3, then, repeating similar reasoning, we can establish that the market demand for the products of firm No. 1 will be 50 units. (100-50 = 50). It is easy to understand that by going through different possible price levels, we will receive different levels of market demand for the products of firm No. 1. In other words, a new demand curve will form for the products of firm No. 1 (in our graph ¾ D 1) and, accordingly, a new marginal income curve (MR 1). Again, using the MC = MR rule, a new optimal production volume can be determined (in our case, it will be 25 units).
Cournot equilibrium.
To better understand all the consequences of this pattern, let us turn to Fig. 9.3. Horizontally, the size of the production of one firm is plotted, vertically - another. The size of the output of firm # 1 is depicted as a response curve to the volume of production of firm # 2. Similarly, the output of firm # 2 is presented as a function of the volume of production of firm # 1:
Q (1) = f (Q (2)), Q (2) = f (Q (1)), where Q (1) is the production volume of firm No. 1, and Q (2) is the production volume of firm No. 2.
Rice. 9.3. Cournot equilibrium
Let's see if both firms will be able to establish mutually acceptable production volumes? We took all the data for the graph from the previous example. So, if it is known about firm No. 2 that it is going to release 75 units. products, then the firm number 1 will decide on the release of 12.5 units. (see point A). But if firm No. 1 does indeed release 12.5 units, then, as can be seen in the graph, firm No. 2, in accordance with its reaction curve, should release not 75, but 42.5 units. (point B). But such a level of output by a competitor will force firm No. 1 to produce not 12.5 units, as it was going to, but 29 units. (point C), etc. It is easy to see that the level of production set by the company based on the existing size of the competitor's production, each time turns out to be such that it forces the latter to reconsider it. This causes a new adjustment in the volume of production of the first firm, which in turn again changes the plans of the second, that is, the situation is unstable, non-equilibrium. However, there is also a point of stable equilibrium ¾ this is the point of intersection of the reaction curves of both firms (on the graph ¾ point O). In our example, firm # 1 produces 33.3 units, assuming that the competitor will produce the same amount. And for the latter, the issue is 33.3 units. really is optimal. Each of the firms produces a volume of products that maximizes its profits for a given volume of production of a competitor. It is not profitable for any of the firms to change the volume of production, therefore, the equilibrium is stable. In theory, it was called the Cournot equilibrium. Under Cournot equilibrium
we understand a combination of the output volumes of each of the firms in which none of them has incentives to change their decision: the profit of each firm is maximal provided that the competitor maintains the given output. Or, to put it another way: at the Cournot equilibrium point, the expected by competitors of the output of any of the firms coincides with the actual and at the same time is optimal. The existence of a Cournot equilibrium suggests that oligopoly as a type of market can be resilient, that it does not necessarily lead to continuous, painful market limits by oligopolists. The mathematical theory of games shows that the Cournot equilibrium is achieved under some assumptions about the logic of behavior of duopolists, while under other assumptions ¾ it is not. In this case, the decisive importance for achieving balance is the intelligibility (predictability) of the actions of the competing partner and his readiness for cooperative behavior with the rival.