duopoly market， how to find best-response curve
Be as detailed as possible
A market in which there are only two sellers/producers is called duopoly. Economists have formed different models which examine the behaviour of duopoly firms. They include the Cournot model, Bertrand model, Collusive Duopoly model etc.
Cournot’s Duopoly Model
Augustine Cournot, a French economist, in 1838, developed a model which is known as Cournot's duopoly model. Cournot explains his duopoly model with an example of two production units with zero cost of production having a spring of mineral water or a mineral well.
Assumptions:
- There are two firms or producers.
- Both firms own a mineral well each.
- Cost of production is zero.
- The demand curves of the firms are linear.
- Each firm assumes that the rival firm will keep its output constant.
- Lastly, the objective of the firms is to maximize profit.
In the Cournot model, each firm under duopoly reaches equilibrium when it produces one-third of the market demand at which price is zero. Both the producers together produce two-third of market demand. The price at this point is the equilibrium price. The profit of both firms will be equal at equilibrium.
Conditions:
- In a duopoly, as the cost of production is zero, MR=MC=0.
- At the last stage, the supply of both firms should be equal. Supply of each producer should be one-third of the total market demand in which the price is zero.
Step by step
Solved in 3 steps
