I guess this was made for some class during spring covid, but it has a great impact even outside. Thank you for great explanation! If people like you continue doing this, bad teachers are losing their jobs.
Bertrand tends to be in industries that can increase quantity very quickly, often because they have low capital/fixed costs. Cournot tends to be a better description of industries that have higher fixed costs and, therefore, cannot increase quantity as easily.
You take the two equations from the previous slide and solve one for either q1 or q2. You then take that solution and plug it into the other equation. So if you solve the first equation for q1 and plug that into the second equation, you will have an equation with only q2 (and all of the constants). You can solve that for q2* and use that solution back in the first equation to solve for q1*.
@@Elpicoolface1106 If the two firms are identical (mainly identical costs) then q1 = q2. But if they have different costs, then the two quantities can be different.
I am currently writing a project using cournot. Is it possible to measure consumer surplus and producer surplus under cournot? Since we dont have a supply curve?
To calculate consumer surplus, you just need the demand curve and the equilibrium price. For producer surplus, you can use the marginal cost curve and calculate the gross profit = q*(p-mc).
@@liammalloy That makes great sence- thanks for the answer. Between producer surplus the demand curv is an empty triangle over marginal cost. Is it correct, that this triangle is the dead weight loss?
@@pippophol Deadweight loss is the triangle above marginal cost, below the demand curve, to the right of the Cournot quantity, and to the left of what would be the competitive equilibrium.
@Liam Malloy Great we got it. How do you calculate the deadweight loss when costs are assymetric? One triangle is inside the other triangle which is a bit confusing.
@@pippophol Remember that DWL is a market phenomenon, not specific to a firm. Assuming products are homogenous, you need to figure out what the market price and quantity are under Cournot and what they would be under competition. This last bit could be tricky with asymmetric costs. If both firms are in the market, then we would expect price to be equal to the higher marginal cost. But it's possible that the firm with the lower marginal cost will undercut its competitor (by a penny) to drive them out of business and take the entire market. You'll have to figure that out.
Hi Rul. If you're asking about why we set q1=q2 in slide 5, the answer is that both firms are identical and this is just a shortcut to get the solution. We could instead recognize that we have 2 equations and 2 unknowns and then solve by substitution (or whatever your preferred method is). This is shown graphically on slide 8 where the best response functions are symmetric and where they intersect is where q1 = q2. When the firms are not identical (for example, if they have different marginal costs), then we have to do that because they will not end up producing the same amount. This is the problem we address starting on slide 9. I don't go into the details of the solution, but it should be pretty easy to solve going from those two equations on slide 9 to the solutions on slide 10.
I wouldn't say that there's no supply curve, it's just that usually we assume a constant marginal cost for simplicity. This gives a horizontal supply curve. But we don't solve the problem the same way as we do with a monopoly, so we don't generally graph the supply curve.
@@liammalloy Alright- So if we were forced to graph the supply curve, it would be the same as the marginal cost curve(given MC is constant)? or what would it look like? In monopoly the demand curve is the same as the supply curve if we were to graph it right? Thank you for your help.
@@pippophol I would say yes, after all, that's what we do for a monopoly. But it depends on what you mean by the supply curve. The profit-maximizing quantity, q*, will vary by price. So you could graph that (times 2 if there are 2 firms) and call that the supply curve. Usually we graph the two best response curves in q1 and q2 space. Where they intersect is the Cournot Nash equilibrium.
@@rongjianchen3433 That's correct. There is a marginal cost curve, so supply will change if the marginal cost curve changes. But in a monopoly they will set quantity based on MC=MR and price off of the demand curve.
We're solving for the profit maximization. Setting the derivative equal to zero is where the slope is equal to zero and where profit will be maximized.
@@pippophol Fixed costs are very relevant for over all profitability. But since they are always the same, no matter how much the firm produces, fixed costs are irrelevant when deciding how much to produce.
@@liammalloy That makes sence- thank you again. I am currently writing a project using cournot. Is it possible to measure consumer surplus and producer surplus under cournot? Since we dont have a supply curve?
I guess this was made for some class during spring covid, but it has a great impact even outside. Thank you for great explanation! If people like you continue doing this, bad teachers are losing their jobs.
Hopefully they'll just get better!
help me a lot with understanding all these, clear points, huge thanks
Pure gold mate, thanks
min 11:00 - how to solve for q* in the n firms case? When I try do drive it, I have (2+n) in the denominator...how did you do it?
Excellent video!!
what is the formula for quantity if firm is monopoly?
What are the typical industries that use either cournot or bertrand? Have a nice weekend
Bertrand tends to be in industries that can increase quantity very quickly, often because they have low capital/fixed costs. Cournot tends to be a better description of industries that have higher fixed costs and, therefore, cannot increase quantity as easily.
how do you get q1* and q2* at 9:32
You take the two equations from the previous slide and solve one for either q1 or q2. You then take that solution and plug it into the other equation. So if you solve the first equation for q1 and plug that into the second equation, you will have an equation with only q2 (and all of the constants). You can solve that for q2* and use that solution back in the first equation to solve for q1*.
@@liammalloy so the nash equilibrium (q1*, q2*) can be different? Please answer quick 🙏
@@Elpicoolface1106 If the two firms are identical (mainly identical costs) then q1 = q2. But if they have different costs, then the two quantities can be different.
I am currently writing a project using cournot. Is it possible to measure consumer surplus and producer surplus under cournot? Since we dont have a supply curve?
To calculate consumer surplus, you just need the demand curve and the equilibrium price. For producer surplus, you can use the marginal cost curve and calculate the gross profit = q*(p-mc).
@@liammalloy That makes great sence- thanks for the answer. Between producer surplus the demand curv is an empty triangle over marginal cost. Is it correct, that this triangle is the dead weight loss?
@@pippophol Deadweight loss is the triangle above marginal cost, below the demand curve, to the right of the Cournot quantity, and to the left of what would be the competitive equilibrium.
@Liam Malloy Great we got it. How do you calculate the deadweight loss when costs are assymetric? One triangle is inside the other triangle which is a bit confusing.
@@pippophol Remember that DWL is a market phenomenon, not specific to a firm. Assuming products are homogenous, you need to figure out what the market price and quantity are under Cournot and what they would be under competition. This last bit could be tricky with asymmetric costs. If both firms are in the market, then we would expect price to be equal to the higher marginal cost. But it's possible that the firm with the lower marginal cost will undercut its competitor (by a penny) to drive them out of business and take the entire market. You'll have to figure that out.
is the Cournot equilibrium a Nash equilibrium. Please explain.
Yes, it is a mutual best response. Neither firm can do better based on the other firm's production decision.
@@liammalloy thank you good sir
Would I be able to ask you a question via email to see what you think or provide some tips?
I'll reply if I can. Summer's a good time.
Why in the equilibrium point Q1=Q2?
Hi Rul. If you're asking about why we set q1=q2 in slide 5, the answer is that both firms are identical and this is just a shortcut to get the solution. We could instead recognize that we have 2 equations and 2 unknowns and then solve by substitution (or whatever your preferred method is). This is shown graphically on slide 8 where the best response functions are symmetric and where they intersect is where q1 = q2.
When the firms are not identical (for example, if they have different marginal costs), then we have to do that because they will not end up producing the same amount. This is the problem we address starting on slide 9. I don't go into the details of the solution, but it should be pretty easy to solve going from those two equations on slide 9 to the solutions on slide 10.
@@liammalloy thank you.
Why is there no supply curv in cournot?
I wouldn't say that there's no supply curve, it's just that usually we assume a constant marginal cost for simplicity. This gives a horizontal supply curve. But we don't solve the problem the same way as we do with a monopoly, so we don't generally graph the supply curve.
@@liammalloy Alright- So if we were forced to graph the supply curve, it would be the same as the marginal cost curve(given MC is constant)? or what would it look like?
In monopoly the demand curve is the same as the supply curve if we were to graph it right?
Thank you for your help.
@@pippophol I would say yes, after all, that's what we do for a monopoly. But it depends on what you mean by the supply curve. The profit-maximizing quantity, q*, will vary by price. So you could graph that (times 2 if there are 2 firms) and call that the supply curve.
Usually we graph the two best response curves in q1 and q2 space. Where they intersect is the Cournot Nash equilibrium.
@@liammalloy but if it is monopoly there is no supply curve right? Because firm get to set their own price.
@@rongjianchen3433 That's correct. There is a marginal cost curve, so supply will change if the marginal cost curve changes. But in a monopoly they will set quantity based on MC=MR and price off of the demand curve.
goat
Why do you put the quations equal to 0?
We're solving for the profit maximization. Setting the derivative equal to zero is where the slope is equal to zero and where profit will be maximized.
@@liammalloy Thank you for the great answer :D Why do we only work with marginal costs? Are fxied cost not relevant at all?
@@pippophol Fixed costs are very relevant for over all profitability. But since they are always the same, no matter how much the firm produces, fixed costs are irrelevant when deciding how much to produce.
@@liammalloy That makes sence- thank you again. I am currently writing a project using cournot. Is it possible to measure consumer surplus and producer surplus under cournot? Since we dont have a supply curve?