Cournot-like Interaction with Cournot Outcomes

Abstract

This article works out a Cournot duopoly where firms take price as given, but it is not the same price that is taken for given by each firm; it depends on individual expectations about opponent’s behaviour as are shaped by the business cycle. Yet, the result of this interaction is a Cournot equilibrium as if the calculations were based on the same price. It is not the price that would be assumed in the absence of expectations. Expectations make inverse-U-shaped reaction curves peak at higher output levels relative to peaks in their absence, implying a lower price vis-à-vis that which is taken for granted in the traditional analysis. And, output levels are higher because they reflect optimism for the course of the economy. In the static context of the analysis, a Cournot equilibrium comes about as if the business cycle is at each peak. Policy-wise, the message is that observed price variations in an oligopoly do not necessarily indicate Bertrand competition despite the possibility that dynamic interaction may lead to outcomes other than the Cournot one; but it will be about disequilibrium and unstable outcomes. JEL Classifications: D43, L13, E32