Classical Models of Oligopoly: Cournot and Bertrand’s Models

• Cournot’s model of oligopoly (1838), proposed by the French economist Cournot, is one of the earliest theories explaining the behaviour of individual firms under non-collusive oligopoly.

• In the Cournot model, each oligopolist assumes that rival firms will keep their output unchanged regardless of any action taken by him; thus, an oligopolist does not consider possible reactions of competitors while making output decisions.

• Another important non-collusive oligopoly model was developed by E.H. Chamberlin in his work “The Theory of Monopolistic Competition.”

• Chamberlin’s model represents a significant improvement over classical oligopoly models, including the Cournot model, because it incorporates the idea of mutual interdependence among oligopolistic firms.

• Unlike Cournot and other classical theorists, Chamberlin assumes that firms recognise their interdependence while determining output and price, and therefore take into account the likely behaviour of rival firms.

• By recognising interdependence, Chamberlin’s model reaches a monopoly solution for price and output under oligopoly, where firms behave in a manner that jointly maximises industry profits rather than acting as if rivals’ decisions remain unaffected by their own actions.

Cournot’s Duopoly Model

• Augustin Cournot, a French economist, published his duopoly theory in 1838, but it remained largely unnoticed until the 1880s, when Walras drew economists’ attention to Cournot’s work.

• Cournot’s analysis deals specifically with duopoly, and is based on a set of simplifying assumptions regarding price and output determination.

• Cournot considers two identical mineral springs owned by two different producers who sell mineral water in the same market; since the water supplied by both producers is identical, the model relates to duopoly with homogeneous products.

• For simplicity, Cournot assumes zero cost of production:

  • The owners can extract and sell mineral water without incurring any production cost.

  • This allows the analysis to focus entirely on the demand side of the market.

  • The assumption is made only to simplify exposition; the model can also be presented when production costs are positive.

• The duopolists are assumed to possess complete knowledge of market demand, meaning they know every point on the demand curve.

• The market demand curve facing the two producers is assumed to be linear (a straight line), simplifying the analysis of output and price decisions.

• The most crucial assumption is that each duopolist believes that the rival’s output will remain constant, irrespective of his own actions or the resulting changes in market price.

• Each firm determines the output level that maximises its own profit by taking the current output of the rival as given and assuming that this output will not change.

• While deciding its output, a duopolist does not anticipate or consider any reaction from the rival firm to changes in its own output.

• As a result, each firm acts independently in output determination, basing decisions on the assumption of a fixed rival output rather than on strategic interdependence.