Zach and Yann are the only ones growing coffee beans in their area. They compete for a population of coffee lovers who are willing to purchase a large quantity of coffee. How do they compete? What will be the quantity of coffee beans on the market? At what price?
In this chapter, we'll answer these questions assuming that the market corresponds to a Cournot duopoly.
The first objective is to calculate Cournot equilibrium step-by-step:
- Best Response Functions — Know what quantity a firm produces given the competitor's quantity
- Cournot Equilibrium — Neither producer has incentives to change their quantity if they play the best response to the competitor's strategy
This chapter also covers additional topics such as
- Cartel — Observe that both firms are doing better if they collude but have incentives to betray each other
- Stackelberg Equilibrium — What are the market price and quantity if a firm can enter the market before the other