In economics, Cournot competition is a model of competition named after French economist Antoine Augustin Cournot (1801–1877) in which competing firms choose how much of a good to produce, taking into account the expected production decisions of the other firms. The quantity each firm produces depends on two factors: the price that it would receive if it produced a certain quantity and the quantities that other firms are expected to produce. The general equilibrium outcome of the game is determined by the interaction of these two decisions.
Cournot competition has been used to model many different markets, including oligopoly markets, product differentiation markets, and network industries. It has also been applied to models of environmental policy. The model is one of the simplest ways to study oligopoly, which has important implications for many industries in the real world.
In a Cournot equilibrium, each firm produces a quantity such that the marginal revenue from producing one additional unit is equal to the marginal cost of production. The market price is then determined by the aggregate quantity produced by all firms. Each firm maximizes its profit by choosing the quantity that equates marginal revenue and marginal cost.
The key feature of Cournot competition is that each firm takes into account the expected production decisions of other firms when making its own production decision. This makes Cournot competition different from other models of competition, such as perfect competition and monopoly, in which firms do not take into account the decisions of other firms.
Cournot competition has a number of important implications. First, it predicts that firms will produce less than the socially efficient level of output. Second, it predicts that firms will have an incentive to engage in collusive behavior to increase profits. Finally, it predicts that the market price will be higher than the marginal cost of production.