Question

What can you say, in general, about the Cournot-Nash equilibrium quantities and prices as the number of sellers (n) competing in the industry rises?

Now, think of two firms colluding to earn monopoly profits by each agreeing to enjoy half the market share.

(i)If each firm honors this agreement, calculate each firm’s level of output and the resulting profit enjoyed by each firm.

(ii)In general, when can such an arrangement be feasible, that is, when will each firm have an incentive to honor such an agreement?

Answer 1

Cournot competition is an economic model that describes an industry structure in which competing firms that make the homogeneous product and choose a quantity to produce independently and simultaneously.

If the number of firms rises, the market structure will tend to become a perfect competition, in comparison to the Cournot Model, the price will fall and the quantity produced will rise.

1) If each firm honors the agreement, the quantity produced, by the CARTEL, will fall to the monopoly level and the price will rise to monopoly level and resulting profit rises. Each firm is a monopoly supplier of half the industry output and chooses the output that creates equality between its marginal revenue (and the industry marginal revenue) with its own marginal costs,

2) Such type of arrangement is feasible if the contract is written down and legally enforceable because in this way no firm can cheat on others. By honoring such agreement each firm will earn more and at the production of lesser quantity.