Question
Consider a Cournot duopoly where two firms produce a
homogeneous good and choose quantities simultaneously. Both firms have identical and constant marginal costs, and the market demand curve is downward sloping. In equilibrium, how does the market price compare with the monopoly price and the perfectly competitive price (equal to marginal cost)?Solution
In Cournot competition, firms choose quantities strategically: Total output is higher than monopoly (since two firms produce) But lower than perfect competition (since firms still have market power) Because demand is downward sloping: Higher output than monopoly → price falls below monopoly price Lower output than competition → price remains above marginal cost So, P_Monopoly>P_Cournot>P_Competitive (=MC) Hence, the price lies between monopoly and competitive levels.
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