Oligopoly and Strategic InteractionsSanja Samirana PattnayakIIMTOligopolyThe Cournot ModelOligopoly model in which firms produce a homogeneous good, each firm treats the output of its competitors as fixed, and all firms decide simultaneously how much to produceirm will adjust its output !ased on what it thinks the other firm will produceOften called "uantity competition"uantity competition # for example international oil production$23456789101112131415Cournot model: Example%n &xample of the Cournot &"uili!riumTwo firms face linear market demand cur'e and has short run marginal cost scheduleMarket demand is P ( )* + , , is total production of !oth firms- , ( ,. / ,01oth firms ha'e MC. ( MC0 ( *&ach irm2s action is to choose a le'el of productionirm i2s profit is ( ) ( ) [ ] Q Q Q Q Qi j i j i i+ = )* , 16Duopoly Example3e want to calculate what each firm2s profit maximi4ing output le'el, i$e$ Their !est response, to the other firms output decision$This is called the firm2s reaction functionirm .2s 5eaction Cur'e M56,07(MC17Duopoly ExampleCalculating the reaction functions0.8Cur'e 5eactions 09 irm0.8Cur'e 5eactions .9 irm*0 )*.00.. .0 . . . .QQQQMC MRQ Q Q R MR = == = = =18Duopoly ExampleIn a :ash e"uili!rium Q1 and Q2 are !est responses to each other$ ( )each ;.** are profits , .* )*0*.*0.8.8