# Cournot Equilibrium

I'm trying to determine reaction functions of a Cournot equilibrium for $n$ firms using the same optimal condition, using the fixed point method.

This is the method I'm using:

fixedPoint[Gs_, X_, X0_, tol_, nmax_] :=
Module[{G, sol, oldsol, iter, n, i},
(*Vectors Gs and X must have the same length*)
n = Length[X];
G[s_] := Gs /. Table[X[[i]] -> s[[i]], {i, 1, n}];
infNorm[s_] := Max[Abs[s]];
sol = X0;
oldsol = sol + 2*tol;
iter = 0;
While[And[iter <= nmax, infNorm[sol - oldsol] > tol],
oldsol = sol;
sol = G[sol];
iter++];
Print["Performed ", iter, " iterations"];
If[iter >= nmax, Print["WARNING: Maximum number of iterations was reached"]];
sol]


The equilibrium condition is (the derivative of profit with respect to quantity):

(((qt)^(-1/eta)) - (1/eta)*((qt)^(-1/(eta - 1)))*qi )-ai*q1 == 0


Where eta and ai are parameters, qt is the sum of the quantities produced by the $n$ firms, and qi is the quantity produced by a single firm.

So, my problem is determining the Gs argument of my method for $n$ firms. How do I generate $n$ optimal functions, each assuming its corresponding values for ai and qi?

• (1) In your last equation, should q1 be qi, or vice versa? (2) Is ai a firm-specific parameter in firm is cost function, or is it a scalar parameter of inverse demand? (3) you should check the docs on built-in functions FixedPoint and NestWhile, and (4) Welcome to Mma.SE. – kglr Nov 12 '12 at 0:49
• ... and the exponent in the second term should be (-1/eta -1)? – kglr Nov 12 '12 at 7:16
• 1) you are right, q1 should be qi. 2)Exactly, ai is a firm-specific cost parameter. The cost function i'm using is (1/2)*ai*(qi^2) 3)I'll do that. Thank you. Yes, the exponent is (-1/(eta-1)) – 42afac Nov 13 '12 at 15:31
• And let me add that the demand function is P(Q)=Q^(-1/eta). – 42afac Nov 13 '12 at 16:27
• Sorry for the imprecision, the exponent should be (-1/eta)-1. – 42afac Nov 13 '12 at 18:14

It is unclear why you are going down this path. The wikipedia link contains all the derivations and for $n$ firms, using your variables, the solution, for all q's, is

$q=ai/eta*(n+1)$

and for the industry:

$Q=n*ai/eta*(n+1)$

ls = {1, 2, 3, 5, 8, 20};
ls1 = (10.*#)/(1 + #) & /@ {1, 2, 3, 5, 8, 20};

xy = {#, 10. - #} & /@ ls1;

lines = {{0, 10. - #}, {#, 10. - #}, {#, 0}} & /@ ls1;

Text[Row[{Style["N", FontSize -> 8, Italic],
Style[" = " <> ToString[#1], FontSize -> 8]}], #2 + {0.4,
0.2}] &, {ls, xy}];

Plot[10. - Q, {Q, 0, 10},
Axes -> True,
AxesStyle -> AbsoluteThickness[1],
AxesLabel -> {Style["Q", FontFamily -> "Times", Italic],
Style["P", FontFamily -> "Times", Italic]},
Epilog -> {AbsoluteThickness[0.5], Line /@ lines, txt},
Frame -> False,
PlotStyle -> {Blue, AbsoluteThickness[1]},
PlotRegion -> {{0, 1}, {0, 1}},
PlotRange -> {{0, 11}, {0, 11}},
Ticks -> None
]


For the case of duopolies you can graphically compare Bertrand and Cournot:

For Bertrand $Q$ is defined as constant and firms compete on price so taking a diagonal slice across quantities shows why there is a horizontal demand curve for each firm

pc = Plot3D[10 - q1 - q2, {q1, 0., 10.}, {q2, 0., 10.},
AxesEdge -> {{-1, -1}, {1, -1}, {-1, -1}},
AxesLabel -> {label1, label2, label3},
ClippingStyle -> None,
Exclusions -> {10 - q1 - q2 == 0},
ImageSize -> 400,
PlotRange -> {{0., 10.}, {0., 10.}, {0., 10.}},
Ticks -> None
];

Show[pc, Graphics3D[{
Polygon[{{0., 6., 0.}, {0., 6., 10.}, {6., 0., 10.}, {6., 0.,
0.}}]}]]


For Cournot $Q$ is not defined as constant, but rather the $q$ of other firm(s) is constant so there is never a horizontal demand at the firm level under this model, even for very large $n$

pc = Plot3D[10 - q1 - q2, {q1, 0., 10.}, {q2, 0., 10.},
AxesEdge -> {{-1, -1}, {1, -1}, {-1, -1}},
AxesLabel -> {label1, label2, label3},
ClippingStyle -> None,
Exclusions -> {10 - q1 - q2 == 0},
ImageSize -> 400,
PlotRange -> {{0., 10.}, {0., 10.}, {0., 10.}},
Ticks -> None
];

Show[pc, Graphics3D[{Polygon[{{0., 2., 0.}, {0., 2., 10.}, {10., 2.,
10.}, {10., 2., 0.}}]}]]


• You are right. I was following an unnecessary path. Thank you very much. – 42afac Nov 13 '12 at 15:15