16/07/2019

3. Static Games of Complete

Information
Cournot Model of Duopoly

1. Cournot Model of Duopoly

• There are two firms 𝑖 and 𝑖 producing the same good (homogenous
product)
• Denote by 𝑞 and 𝑞 the quantities produced by the firms
respectively, and by 𝑃 𝑄 = 𝑀𝑎𝑥{𝑎 − 𝑄, 0} the market-clearing price
when the aggregate quantity on the market is 𝑄 = 𝑞 + 𝑞
• Assume that the total cost to firm i of producing quantity 𝑞 is
𝐶(𝑞 ) = 𝑐𝑞
• there is no fixed costs
• the marginal cost is constant at c
• we assume c < a
• We suppose that the firms choose their quantities simultaneously

1
 16/07/2019

Normal-form game
• There are two players (firms): 𝐼 = {𝑖 , 𝑖 }

• The strategies available (continuum) to each firm are the different

quantities 𝑄 = 0, ∞
• An element of 𝑄 is denoted 𝑞
• One could reduce the set 𝑄 to [0, 𝑎] since P(Q) = 0 for Q > a

• The payoff of firm i for a profile (𝑞 , 𝑞 ) is its profit defined by:

𝜋 (𝑞 , 𝑞 ) = 𝑞 𝑃 𝑞 + 𝑞 −𝑐

Game solution
• Nash Equilibrium?
• Interpretation
• Graphical solution
• Proof by iterated elimination of strictly dominated strategies