Abstract

The aim of this paper is to theoretically establish the application of Cournot’s model of competition as the reduced form of two-stage competition in oligopoly markets, in the circumstances with limited capacities. In this manner, a valuable tool is provided to the competition protection authority for analysing the unilateral effects of the horizontal mergers. The outcome of the two-stage competition, where firms chose to have a certain level of capacity, before the price competition, coincides with the outcome of the Cournot quantity competition model. Moreover, it turns out that this result is valid both for the homogeneous products markets and for the markets with differentiated products. This contradicts a standard attitude that quantity is a strategic variable exclusively within the homogeneous product markets. While controlling horizontal mergers, the competition authority often relies on traditional analysis elements, which start with the definition of the relevant market and market shares, and the concentration measures based on that definition. Analyses of this kind are carried out almost in a standard manner, for both markets with homogeneous and differentiated products. It is easy to verify that every analysis of this type encompasses the mentioned model of quantity competition in its foundation. Therefore, the discussion that is presented attempts to eliminate doubts related to the role of the Cournot model in merger control policy.

Highlights

  • This paper aims to theoretically establish, justify and show the possibilities for the application of the classic quantity competition model within industries where firms before they start with the price competition, are required to choose some level of capacity

  • It is a model developed by French mathematician and economist Augustin Cournot in the nineteenth century, which can be considered as a reduced form of such a two-stage game.1. The inspiration for this topic comes from the need to perform a more significant inflow of economic theory into the domain of horizontal merger control, which can be of assistance to authorities in charge of competition protection in gathering evidence for cases that they investigate

  • The starting point is that unilateral effects are exclusively connected to the participants of the concentration, but not to their rivals. These effects could formally be defined by applying the Nash equilibrium concept, which is at the heart of the Cournot model

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Summary

Introduction

This paper aims to theoretically establish, justify and show the possibilities for the application of the classic quantity competition model within industries where firms before they start with the price competition, are required to choose some level of capacity It is a model developed by French mathematician and economist Augustin Cournot in the nineteenth century, which can be considered as a reduced (short) form of such a two-stage game.. It is a model developed by French mathematician and economist Augustin Cournot in the nineteenth century, which can be considered as a reduced (short) form of such a two-stage game.1 The inspiration for this topic comes from the need to perform a more significant inflow of economic theory into the domain of horizontal merger control, which can be of assistance to authorities in charge of competition protection in gathering evidence for cases that they investigate.

Ristić consequential judgement based on market shares and measures of market concentration
The Rationale for Cournot Mechanism
Cournot Mechanism as the Reduced Form of the Two-Stage Competition
Second Stage—Pricing Subgame
First Stage—The Choice of Capacities
Cournot’s Mechanism and Traditional Unilateral Effects Reasoning
Cournot’s Model and Calibrated Merger Simulation
Demand and Cost Functional Form
Model Calibration
Concluding Remarks
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