The Cournot model specifies how two firms in an oligopoly compete in terms of quantity. Briefly describe how the outcome of Cournot oligopoly competition relates to the outcomes of perfect competition and monopoly in terms of output and market efficiency/inefficiency. Can you be more precise about the relation between Cournot, monopoly, and perfectly competitive outputs if you know that demand is linear and marginal costs are constant? Explain.
What will be an ideal response?
Generally, we know that because there is slightly more competition, the total amount produced by the oligopolists will be greater than that produced by the monopoly and thus the oligopolistic market will be more efficient than the monopolistic market. However, competition between two firms is much less than competition in a perfectly competitive market and the duopoly produces less quantity than does the competitive market and is therefore inefficient. If we know that demand is linear, then the following relation holds: QC > QO > QM (where C stands for competition, O for oligopoly, and M for monopoly).
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