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 hardpressed to find homogeneity in the products offered by different suppliers.

Duopoly
A situation in which two companies own all or nearly all of the ... 
Model Risk
A type of risk that occurs when a financial model used to measure ... 
Microeconomic Pricing Model
A model of the way prices are set within a market for a given ... 
Competitive Equilibriums
An equilibrium condition where the interaction of profitmaximizing ... 
Versioning
A business practice in which a company produces different models ... 
Stochastic Modeling
A method of financial modeling in which one or more variables ...

Investing
What is a Business Model?
Business model is the term for a company’s plan as to how it will earn revenue. 
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 ... 
Markets
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. 
Markets
Advanced Game Theory Strategies For DecisionMaking
The importance of game theory to modern analysis and decisionmaking can be gauged by the fact that since 1970, as many as 12 leading economists and scientists have been awarded the Nobel Prize ... 
Markets
Explaining Quantity Demanded
Quantity demanded describes the total amount of goods or services that consumers demand at any given point in time. 
Investing
DCF Vs. Comparables: Which One To Use
DCF and Comparables models are widely used in equity valuation. We explain the pros and cons of each method. 
Trading
How to Build A Forex Trading Model
Forex trading markets work 24/7, providing ample opportunities to make profitable trades. How can you build a profitable forex trading model for yourself? 
Markets
What is a Cartel?
A cartel is a group of companies or countries that act together to control the price of a single good that they produce. 
Trading
How To Build A Forex Trading Model
The forex market is volatile, but a forex trading model with clear, stepbystep rules based on a sound strategy can help decrease losing trades. 
Trading
Circumvent Limitations of BlackScholes Model
Mathematical or quantitative modelbased trading continues to gain momentum, despite major failures like the financial crisis of 200809, which was attributed to the flawed use of trading models. ...

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 >> 
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 >> 
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 >> 
What is the average return on equity for a company in the electronics sector?
Learn about the BlackScholes option pricing model and the binomial options model, and understand the advantages of the binomial ... Read Answer >> 
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 >> 
Why are microeconomic models different in the short run than the long run
Find out why shortrun and longrun microeconomic models treat production, costs and variable change using different given ... Read Answer >>