Page 293 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes So, by supposing this that if A will produce then B will not react or vice versa the output reaction curves
can be drawn on vertical axis for production of A and on horizontal axis for production of B. In Fig. 16.2,
the reaction curve A is AL and reaction curve for B is RB. Let’s assume firm A produce OG. By fixing
this that A will not change OG, firm B reacts by producing OH. Then A reacts by assuming that B will
not react in its production OH and produces OE. Again B reacts and produces OF. Now we see that by
reacting A on B, the production of A decreases and the reaction on B over A increases its production.
This reaction occurs till both reach on Cournot point C where both A and B produce similar production.
The production of A is equal to OM while production of B is equal to OF. This conclusion comes on that
time when we move downward from right to above in Fig. 16.2. Thus, the analysation of reaction curve
model is affected to get Cournot model.

Fig. 16.2

R
B's Reaction Curve
A's Output G Cournot Point
A
E
C
M
A's Reaction
Curve
O HF N B L
B's Output

Its Criticism

These are the following criticisms of Cournot model—

(1) The main defect in Cournot model is every seller assumes that the supply of their opponent is
stable, while he saw it changes every time. In 1883, one French mathematician Joseph Bertrand
criticized Cournot that seller will make his price less than B for those customers who by passed
to B earlier and this less price strategy will continue till price comes on zero. Thus Bertrand
proposed that there is no limit of falling prices because every producer can double his product
and set less price irrespective to his opponent. Thus, the price would come in competitive level
in long run.

(2) This is stable model because it does not give any idea when a firm reacts and adjusted its production
as per another firm’s tactics.
(3) The Cournot solution is not real because it shows zero production cost.
(4) This is closed model because it neglects the entry of other firms.
(5) This assumption is also not real that every dupololist works without knowing another. In fact this
model is like ‘not working’ model.
(6) According to Marshall, “The Cournot model is unable to give universal solution.” This is because
to find a duopoly market where every dupololist works independently and there is no parameter
of production process.

286 LOVELY PROFESSIONAL UNIVERSITY