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Unit-16: Duopoly and Oligopoly: Cournot Model and Kinked Demand Curve

B is zero and it matches with parallel axis. Suppose that firm A is a single manufacturer. In this case Notes
when its MR curve is equal to MC curve (parallel axis) on point A then it produces and sells OA
1
(= ½ OD ) quantity. It takes monopoly price AS (= OP) and gets monopoly profit OASP. Now firm
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B comes into market and hope that firm A will not change its production level OA. So, it takes the
part SD to its demand curve. Its marginal revenue curve is MR which intersects its MC curve on
2
1
point B. So it sells AB quantity (=1/2 OD = BD ) on BG (OP ) price and hope to get profit as BGTA.
1 1 1

The duopoly is the unique part of monopoly theory where there are only two sellers.

Firm A knows that the price is decreased from OP to OP as B comes in market. So the assumed profit
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falls as OP TA. In this stage, it tries to adjust its price and production. To fix that firm B will sell the
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AB (= BD ) quantity, firm A sells ½ OB. Thus the decrease in quantity from OA (= 1/2 OD ) to ½ OB
1
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rises the price which is not shown to simplify the figure. B reacts as the production of A decreases

and increased its production to ½ (OD – 1/2 OB) and by this price drops. Thus the price increases
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due to decrease in production by firm A and the production increment by B by which price increases;
the equilibrium price would be OP . In this price, the total production of mineral water is OF, which
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equally differentiate in both firms. Each sells 1/3 parts of market demand means firm A sells OC and
firm B sells CF. In this price the profit of A is OCLP = profit of B CFRL.
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It is clear that both firms sell 2/3 of total production OD . If number of firms is n then rate of production
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will multiple of n/n + 1. The total production of both the firm A and B is 2/2 + 1 = 2/3. So the total
production of A + B is OD (1 – 1/2 + 1/4 – 1/8 + 1/16 – 1/32 + 1/64…) = 2/3 OD = OF.
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The duopoly solution of Cournot is tally with perfect competition solution. The duopoly firms A and
B take price OP and sell quantity OF in equilibrium state. Under perfect competition, total production
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will be OD in zero price. Price is zero because marginal cost is zero. When MR curve intersects parallel
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axis MC curve on point A then price will be zero. The total production OD will equally distribute
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between A and B firm: OD = OA + AD . OA = AD In Cournot solution, OP price is greater than
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2
1
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marginal cost and zero price and perfect competitive production OF is less than OD . But in Cournot
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solution, production OF is greater than monopoly production OA but price OP is less than monopoly
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price OP. Mathematically, in Cournot solution the production is 4/3 of monopoly production and 2/3
of perfect competition.
Conclusion: The Cournot model could increase from two firms. When more firms are entered
in oligopoly market then the price and production of industry will go OD for perfect competitive
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production and price will go to zero.
Self Assessment
Fill in the blanks:
1. The duopoly is the unique part of monopoly theory where there are only ......................... sellers.
2. According to Cournot model, the cost of production is ........................ .
3. Every consumer knows about the market ......................... of the product.

Cournot Model in Terms of Reaction Curves

As the assumption of the basic model of Cournot, the economists have given a better solution by
reaction curves. This definition takes an extra assumption that duopoly firms react from its competitive
firm irrespective to production tactics.

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