Handout 16 Oligopoly – Cournot Duopoly Model This handout contains exercises of - Cournot Duopoly Things you should know - How to solve the Cournot duopoly model? Exercises Question 1 (Cournot Model with Two Identical Firms) Suppose there are two firms – A and B – competing as Cournot duopolists. The demand curve of this good is given by P = 100 – Q, where Q is the total quantity in the market. Both firms have the identical cost structure such that each unit of good costs AC = MC = 40. Graphically explain your answers in each step. 1. Suppose currently there is only one firm in the market, what is the quantity this monopolist would produce? What is the profit for this monopolist? 2. Find the quantity that would be sold if this market were to be a perfectly competitive market. 3. Find the equations of reaction functions of both firms. 4. What are the quantities sold by each firm when they compete as Cournot duopolists? 5. What are the profits of each firm when they compete as Cournot duopolists? 6. If the two firms were to collude, what would be the quantity sold in the market? What would be the profits of each firm? Compare your findings to when they compete as Cournot duopolists. Question 2 (Cournot Model with Two Non-Identical Firms) Suppose there are two firms – A and B – competing as Cournot duopolists. The demand curve of this good is given by P = 120 – Q, where Q is the total quantity in the market. Suppose firm A is more efficient and its cost structure is given by AC = MC = 20, while firm B is less efficient and AC = MC = 40. 1. Find the equations of reaction functions of both firms. 2. What are the quantities sold by each firm when they compete as Cournot duopolists? 3. What can you conclude from your findings? Question 3 (Cournot Model with Missing Cost Information) Suppose the reaction functions of two firms are given by qA = 10 – 0.5qB and qB = 10 – 0.5qA. The market demand is known as P = 50 – Q. Assuming that both firms have constant and identical marginal cost, what is the marginal cost for both firms? 1