Managerial Economics

Duopoly
Cournot’s Dupoly Model
 Central features of the Cournot Model:
1. Each firm chooses a quantity of output instead of a
price.
2. In choosing an output, each firm takes its rival’s
output as given.
 Cournot’s Dupoly Model

Cournot’sDu0poly Model
Assumptions
1. There are 2 independent firms producing and selling identical products.
2. Both operate at zero cost
3. Both face demand curve with constant negative slope
4. Each acts that the other will not react to his decision to change output or
price
5. Each Seller is rational and aims at maximizing profits
6. Each firms has complete knowledge about demand, prices etc.

Illustrates the principle of mutual interdependence among sellers in

tightly concentrated markets--even where such interdependence is
unrecognized by sellers.
Curnot’s Dupoly Model
MRA

Revenue/ PA MRB
Costs

PB MC=0

O X Y D
Quantity (units)
 Curnot’s Dupoly Model
 There are two firms A and B
 A first enters the market to produce mineral water (MC=0)
 For Profit maximization A would be in equilibrium at MRA = 0,
i.e. MR=MC. Equilibrium would be at X where it produces
OX=1/2 OD units at OPA price.
 B later enters the market and realises that it can supply only the
remaining market i.e. ½ OD. B produces XY i.e. ½ of XD and
sells at OPB price.
 A assumes that B will keep on supplying ¼ and considers the rest
of the market i.e. ½ x ¾ = 3/8
 B will supply ½ of the remaining i.e. ½ (1-3/8 )=5/16
 Curnot’s Dupoly Model
 A’s output is decreasing and B’s output is increasing. This will
continue till each firm is supplying 1/3 and leaving 1/3
unsatisfied.