Question

Assume that Apple and Samsung are a Cournot duopoly in the cellphone market in the United States. Graphically derive the response function for Apple and Samsung and the Cournot equilibrium. Make the appropriate assumptions. Then,

Explain how the price and quantity that maximize profits are determined if there is only one firm in the market.

Explain how the Cournot equilibrium is derived

Explain what happens to price and quantity when the market changes from the monopoly to the Cournot duopoly.

Explain the behavior of each firm’s profits when the market changes from the monopoly to the Cournot duopoly.

Answer 1

The Cournot model explains how oligopoly firms behave if they simultaneously choose how much they produce.

Here,major assumptions are,

1.There are two firms and no others can enter the market.

2.The firms have identical costs.

3.The firms sells identical products.

4.Firms sell their quantities simultaneously.

5.Each seller faces a demand curve with constant negative slope.

6.Cost of production is assumed to be zero.

7.Each seller aims at obtaining maximum net revenue or profit.

The Cournot model provides results which are of some importance to industrial economics.First of all,it can be shown that price will not in most cases equal marginal costs and Pareto efficiency is not achieved.Moreover,the degree to which each firm's price exceeds marginal cost is directly proportional to the firm's market share and inversely proportional to the market elasticity of demand.If the oligopoly is symmetric,that is,all firms have identical products and cost conditions,then the degree to which price exceeds marginal cost is inversely related to the number of firms.Thus,as the number of firms increases,the equilibrium approaches what it would be under perfect competition.More generally,it can be shown that for the industry the degree to which price exceeds marginal cost is directly proportional to the Herfindahl- Hirschman Index of concentration.As concentration rises,industry performance deviates more from the norm of perfect competition.