Cournot competition is an economic model where companies compete based on the amount of product they produce, usually in a monopoly or oligopoly. The model requires competition to be centered around the quantity produced of a specific good, making the market inefficient and not favorable to consumers. Inefficiencies occur in an industry where there is competition in Cournot, and cartels or collusion can also occur.
Cournot competition is an economic model in which companies compete based on the amount of product they produce. This model is named after Antoine Augustin Cournot, who was inspired in 1838 after watching a competition in the spring water sector in which there were only two competitors. Cournot’s model of competition is usually only observable when there is a monopoly or oligopoly. The general premise of the model is that oligopolies will have higher output and lower prices than monopolies, but lower output and higher prices than perfect competition.
The basic principles of this model require that competition be centered around the quantity produced of a specific good. In general, when more than one good is produced, its price decreases. This is not necessarily the case in this model, as monopolies or duopolies face no competitive pressure to lower prices. Prices will only decrease if production exceeds demand, so businesses don’t overproduce and encourage competitors to do the same. This makes the market inefficient and not favorable to consumers.
In Cournot’s competition model, products across suppliers are homogeneous, not storable, and prices are set by the market. Goods of this model can be sold and delivered immediately at the price established by the market. The types of products most favorable to this model of competition are agricultural products such as rice, wheat and cotton.
The use of the Cournot competition model is usually found in situations where companies want to maximize profits based on the level of production in the market. The objective is to avoid oversupply in the market so that prices do not fall and to ensure that enough products are produced to capture the maximum amount of revenue. Firms will use the total market output level and measure it against demand to calculate how much to produce. The different businesses will act as a monopoly, adopting the same strategy.
Inefficiencies occur in an industry where there is competition in Cournot. The equilibrium price is higher than the marginal cost of production; therefore, consumers are paying more than they would under perfect competition. Surpluses also exist as there is no downward pressure for businesses to reduce production. Cartels or collusion can also occur in industries with Cournot competition. Firms have an incentive to raise prices or reduce production in order to increase profit. Cartels are illegal in most countries, but informal agreements are usually made.
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