Cournot Competition

What is the 'Cournot Competition'

The Cournot competition is an economic model that describes an industry structure in which competing firms that make the same homogeneous and undifferentiated product choose a quantity to produce independently and simultaneously. The Cournot Competition model makes a number of assumptions – the firms cannot collude or form a cartel, and they seek to maximize profit based on their competitors’ decisions. In addition, each firm’s output decision is assumed to affect the product price. French mathematician Augustin Cournot introduced the model in 1838. The basic version of the Cournot model dealt with a duopoly, or two main producers in a market. While it remains the standard for oligopolistic competition, the model can be extended to include multiple firms.

BREAKING DOWN 'Cournot Competition'

The Cournot model has some significant advantages. The model produces logical results, with prices and quantities that are between monopolistic (i.e. low output, high price) and competitive (high output, low price) levels. It also yields a stable Nash equilibrium, which is defined as an outcome from which neither player would like to deviate unilaterally.

However, the model also has some drawbacks based on its assumptions that may be somewhat unrealistic in the real world. First, the Cournot classic duopoly model assumes that the two players set their quantity strategy independently of each other. This is unlikely to be the case in a practical sense. When only two producers are in a market, they are likely to be highly responsive to each other’s strategies rather than operating in a vacuum.

Second, Cournot shows that a duopoly could form a cartel and reap higher profits by colluding than from competing against each other. But game theory shows that a cartel arrangement would not be in equilibrium, since each company would tend to deviate from the agreed output (for proof, one need look no further than OPEC).

Third, the model's critics question how often oligopolies compete on quantity rather than price. French scientist J. Bertrand in 1883 attempted to rectify this oversight by changing the strategic variable choice from quantity to price. The suitability of price, rather than quantity, as the main variable in oligopoly models was confirmed in subsequent research by a number of economists.

Finally, the Cournot model assumes product homogeneity with no differentiating factors. While Cournot developed his model after observing competition in a spring water duopoly, it is ironic that even in a product as basic as bottled mineral water, one would be hard-pressed to find homogeneity in the products offered by different suppliers.

RELATED TERMS
  1. Duopoly

    A situation in which two companies own all or nearly all of the ...
  2. Model Risk

    A type of risk that occurs when a financial model used to measure ...
  3. Microeconomic Pricing Model

    A model of the way prices are set within a market for a given ...
  4. Competitive Equilibriums

    An equilibrium condition where the interaction of profit-maximizing ...
  5. Versioning

    A business practice in which a company produces different models ...
  6. Business Model

    The plan implemented by a company to generate revenue and make ...
Related Articles
  1. Economics

    Economics Basics: Conclusion

    Recap of the key learnings from Investopedia's economics tutorial .
  2. Trading Systems & Software

    Build a Profitable Trading Model In 7 Easy Steps

    Trading models can provide a powerful tool for building profit. Traders can use and customize existing trading models or build an original model. This article provides seven steps to building ...
  3. Economics

    What is a Business Model?

    Business model is the term for a company’s plan as to how it will earn revenue.
  4. Investing

    Understanding Financial Models

    A financial model is a representation of some aspects of a firm or given security. It uses historical numbers to create calculations that inform financial recommendations or predict future financial ...
  5. Investing News

    How Do Professionals Forecast Crude Oil Prices?

    Discover how the future price of oil is predicted with a weighted combination of mathematical tools. Economists largely use five main models as their base.
  6. Economics

    Explaining Quantity Demanded

    Quantity demanded describes the total amount of goods or services that consumers demand at any given point in time.
  7. Economics

    Advanced Game Theory Strategies For Decision-Making

    The importance of game theory to modern analysis and decision-making can be gauged by the fact that since 1970, as many as 12 leading economists and scientists have been awarded the Nobel Prize ...
  8. Professionals

    Supply and Demand

    Supply and Demand
  9. Professionals

    Supply and Demand

    Supply and Demand. Focuses on price movements caused by shifts in the demand or supply curve.
  10. Professionals

    Monopolistic Competition

    Monopolistic Competition. Looks how monopolistic competition affects the market by introducing oligopolies.
RELATED FAQS
  1. Are perfect competition models in economics useful?

    Take a look at some of the arguments made by the proponents and critics of the theory of perfect competition in contemporary ... Read Answer >>
  2. What is the point of developing a business model?

    Learn some of the benefits of developing a business model and how business models are used. Consider an example of business ... Read Answer >>
  3. What is the difference between financial forecasting and financial modelling?

    Understand the difference between financial forecasting and financial modeling, and learn why a company should conduct both ... Read Answer >>
  4. What is the average return on equity for a company in the electronics sector?

    Learn about the Black-Scholes option pricing model and the binomial options model, and understand the advantages of the binomial ... Read Answer >>
  5. What are some examples of different types of business models in major industries?

    Learn what types of business models are currently being used in the marketplace as well as examples of models that work for ... Read Answer >>
  6. Why are microeconomic models different in the short run than the long run

    Find out why short-run and long-run microeconomic models treat production, costs and variable change using different given ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center