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The Cournot Oligopoly Model

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The Cournot Oligopoly model, established by Antoine Augustin Cournot in 1838, is a fundamental concept in understanding how firms in an oligopoly set output to maximize profits while considering competitors' production. It introduces the Cournot Equilibrium and reaction functions, shaping strategic decision-making in markets with limited competition. This model is particularly relevant in industries like telecommunications and airlines, influencing both business strategies and policy-making in competition law.

Exploring the Cournot Oligopoly Model

The Cournot Oligopoly model, developed by Antoine Augustin Cournot in 1838, is a cornerstone of industrial organization theory, illustrating how firms in an oligopoly determine the quantity of output to produce. This model assumes that each firm's output decision impacts the market price and, consequently, the pricing strategies of competing firms. In a Cournot Oligopoly, firms produce a homogeneous product and aim to maximize profits while considering their rivals' production levels as fixed. The model's simplicity allows for a clear analysis of strategic interactions in oligopolistic markets, making it a vital tool for understanding competitive behavior.
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The Significance of Cournot Oligopoly in Managerial Economics

The Cournot Oligopoly model is a critical framework in managerial economics for evaluating competitive strategies and market dynamics. It emphasizes the mutual dependence of firms, where each firm's output decision is made with foresight of potential reactions from competitors. The resulting Cournot Equilibrium is a state where each firm's output level is such that no firm can increase its profit by unilaterally changing its output, given the output levels of its competitors. The equilibrium quantity for each firm is determined by the formula \(Q_i = (Q_t – \sum_{j\neq i} Q_j) / n\), where \(Q_i\) is the output of firm \(i\), \(Q_t\) is the total market demand, \(\sum_{j\neq i} Q_j\) is the total output of all other firms, and \(n\) is the number of firms.

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00

In a ______ Oligopoly, companies aim to maximize profits by producing a uniform product and assume competitors' output levels remain constant.

Cournot

01

Cournot Equilibrium definition

State where no firm can profit by changing output unilaterally, given competitors' output levels.

02

Mutual dependence in Cournot Oligopoly

Firms base output decisions on expected reactions from competitors, affecting each other's strategies.

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