Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

(A) 
(B) 

---

intersection at E. This point E lies on both the reaction curves. 
Thus, E is that point at which A will produce 
1
/
3
X
c
(competitive 
output) if B produces 
1
/
3
X
c
. Similarly, B will produce 
1
/
3
X
c
units of X 
commodity if A also produces 1/3 X
c
units. Since there is a 
coincidence of plans and fulfillments, the duopoly has reached 
equilibrium of output at E. Until some other factor such as a 
change in consumer demand or a change in price alters the 
conditions under which the equilibrium is maintained, there would 
be no further adjustments in the industry. Thus, E represents 
stable equilibrium. 
 
Significance: 
 
1. Cournot's model, although crude in nature, does depict the 
nature of moves and countermoves made in an oligopolistic 
industry. Viewed from this angle, it may be regarded as a 
precursor of what has come to be known as the Game Theory. 
2. Out of the Cournot's model have come two important concepts 
used in oligopoly. First is the analytical tool known as Reaction 
curves and, second, the concept of conjectural variation. 
3. Cournot's model is good introduction to the difficulties of 
constructing even a limited theory of oligopoly. 
However, this model may be criticised on the following grounds. 
 
Criticism: 
 
1. The firm's behaviour is naive in so far as they do not learn from 
past experience. Without fail, each supposes that the rival will not 
react in response to any action he may take despite the fact that 
there is always a reaction to the move of one's rival. This is 
irrational behaviour for no one learns from experience. 
2. It is a closed model in the sense that entry is not allowed. The 
number of firms that are assumed in the first period remains the 
same throughout the adjustment period. 
3.The model does not say how long the adjustment period will be. 
4. The assumption of costless production is unrealistic However, 
this can be relaxed without any harm to validity of the model. This 
can be done by explaining the model with the help of reaction 
curves. 
However, in Cournot's defence one thing may be said, 
Economic theory has often been criticised for making the 
assumption of rationality. If the critics believe that economic theory 

---

should include some models based on irrational behaviour, here is 
one. 
Oligopoly is a market structure, in which a few sellers 
dominate the sales of a product and the entry of new sellers is 
difficult or impossible. The products can be differentiated or 
standardized. Automobiles, cigarettes, and chewing gums are 
some examples of differentiated products whose market structures 
are oligopolistic. Oligopolistic markets are characterized by high 
market concentration. 
In oligopolistic markets, at least some firms can influence 
price by virtue of their large shares of total output produced. 
Sellers in oligopolistic markets know that when they or their 
competitors change their prices of output, the profit of all firms in 
the market will be affected. The sellers are aware of their 
interdependence. They know that a change in one firm's price or 
output will cause a reaction by competing firms. The response an 
individual seller expects from his rival is a crucial determinant of 
his choices. Examples of Oligopoly are Automobiles, Steel, 
Camera films, Oil, Airline companies etc.