Cournot Oligopoly Model and the Gross Gomestic Product

Microeconomics and Macroeconomics Questions
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Question 1
The Cournot oligopoly model analyzes firm behaviors in an oligopolistic market. In the assumption, it is argued that only a few firms exist, and they act independently in their decision-making. The existing market conditions do not drive him but set its output levels independently to maximize profits (Chirat & Guicherd, 2022). The model has fundamental assumptions that firms must consider before decision-making. One primary assumption is the existence of only a few firms in the same market. Thus, the action of one can have a significant impact on the output and profit outputs of others. Additionally, the model assumes that all the products in the market are homogenous (Gaspar, Medas & Perrelli, 2021). This means that all the firms deal in identical products, and no differentiation exists. Further, the first compete in terms of quantity and not the quality of products since they are all homogenous. Finally, it is assumed that the decisions made are simultaneous. This means that when they make decisions, they do so together and are aware of market dynamics.


Additionally, in the Cournot model, it is assumed that each firm considers the output level of the other entities to remain constant when deciding on its output level. Based on this assumption, firm 1 makes decisions considering the expected impact on other related firms. For instance, Samsung and Apple may be in an oligopolistic market due to their products being phones (Komleh, N.D). Thus, when Samsung decides on the number of their products to be produced to maximize profits, they may consider the impact on Apple. This equilibrium only occurs when the choices of the two firms are in the best response to each other. This means that no firm does not intend to change the output quantity. Thus, the market dynamics remain the same.
The limiting cases of the Cournot include monopoly and perfect competition. In the monopoly market, only one firm exists and provides products to the consumers without competition. The monopolist often sets the prices of the products depending on the demand in the market (Komleh, N.D). On the contrary, in the Cournot model, the competitive pressure decreases as the number of existing firms decreases. As a result, the monopolistic characteristic of the market approaches the monopoly level. Thus, the Cournot model approaches the monopoly level when the firms remain one.
 D D1

price D1
MONOPOLY
 D (MONOPOLISTIC)
Quantity
On the contrary, there exists situations when the number of firms in the market is too high. This results in saturation and can be described as a perfect competition market. Therefore, the Cournot model changes eventually to mimic the perfect competition market. According to experts, the perfect competition market entails a situation whereby the firms are price takers, and the output level of individual firms has no significant impact on the operation of others (Heimberger, 2022). In the long run, individual firms in such a perfect competition market often set their output levels solely dependent on the costs incurred a...