(B)

(A)
Figure 1.1

Now that B has entered the market, A must reconsider his

position. Under the assumption that B will continue to produce AH
units, the best that A can do is to produce ½ of (OB—AH) i.e. OF
units (Panel B). He reduces his output from OA to OF units. Total
supply then OF + AH = OG and the price per unit is OM. Total
profit now increases to OGRM of which A's share is OFTM and B's
share is FGRT. Now that A has surprised B by reducing his
output, B must reconsider his position. Assuming that A will hold
his output constant, the best B can do to produce ½ of (OB—OF)
i.e. ½ FB. Thus, to A's surprise, B increases its output. Then A
must reconsider producing ½ of (OB—B's output). This process
goes on till a total OE units is produced selling for OL price per
unit. Firm A produces OS units and B produces SE units.
Equilibrium is reached when output is ⅔ of OB. Had A and B
joined together, each would have produced ½ of OA and earned
maximum total profits to OAPC. They could have shared them
equally, each getting OVCW in profit. Actually, each earns OSZL
only. Therefore, the result of competition is to lower price and
profits but output is greater than what would be in a monopoly. In
other world consumers are better off because of competition. But
consumers are worse off than what would have been their
condition under perfect competition. Had there been perfect
competition, producers would have produced OB output and price
would have been zero. Since cost is zero, therefore, MC is also
zero. MC = MR at OB output. In short, Cournot's solution results in
output which is ⅔ of that under perfect competition and price
which is ⅔ of the monopoly price (OL is ⅔ of OC).

Reaction curve: But if B sells the output indicated by point

1, A will move to point 2 on his reaction curve. The move to point
2 by A calls for a move by B to point 3 on R BRB and so on. As the
adjustments continue to be made, the firms approach the point of