Cournot Competition

The Cournot model describes a duopoly in which firms simultaneously choose their production quantities. Total quantity sets the market price via the demand function: more output pushes the price down. Each firm optimizes its quantity in anticipation of the other’s output, yielding the Cournot-Nash equilibrium in which no firm has an incentive to change its output unilaterally.

The strategic variable is quantity, not price. Each firm has a reaction function: its profit-maximizing quantity given the rival’s expected quantity. Where the two reaction functions intersect lies the Cournot-Nash equilibrium — both quantities are mutual best responses and neither firm wants to deviate unilaterally. The outcome sits between monopoly (low total quantity, high price) and perfect competition (high quantity, price = marginal cost): the Cournot price lies above marginal cost but below the monopoly price, because each firm internalizes only the price-depressing effect of its own quantity.

For oligopoly analysis of markets where capacity or quantity is the central, hard-to-change decision: commodity extraction, energy generation, semiconductors and heavy industry, capacity planning in general. Also in antitrust to gauge market power and merger effects.

The central lever is capacity signaling and commitment: a firm that credibly announces or, through investment, locks in a given quantity shifts the rival’s quantity expectation and thus their best response (the first-mover Stackelberg advantage). Beyond that, product differentiation partly removes the rivalry from pure quantity logic, since the products are then no longer perfect substitutes.

Oil-producing countries setting their output levels and thereby influencing the world price. Two power generators planning their feed-in volumes. Manufacturers whose plants fix an annual capacity that cannot be adjusted in the short run and so shapes the market.