Conjectures in Cournot Duopoly under Cost Uncertainty

Suyeol Ryu ; Iltae Kim

Assistant Professor, Department of Economics, Andong National University, Andong 760-749, Korea, Tel: +82-54-820-6209, Fax: +82-54-823-1623 syryu@andong.ac.kr
Corresponding Author, Professor, Department of Economics, Chonnam National University, Gwangju 500-757, Korea, Tel: +82-62-530-1550, Fax: +82-62-530-1559 kit2603@chonnam.ac.kr

JEL Classification: D81, L13

Abstract

This paper presents a Cournot duopoly model based on a condition when firms are facing cost uncertainty under risk neutrality and risk aversion. Each firm conjectures about the rival’s output level, and its cost function is assumed to be unknown to its rival. The Cournot model shows that the expected utility maximizing firms, under risk aversion, show different behaviors from the expected profit maximizing firms. This implies that each firm can increase or decrease its output, which depends on the interaction between both firms under cost uncertainty, assuming that both firms are risk-averse.

Keywords:

Cournot equilibrium, Cost uncertainty, Risk aversion

Acknowledgments

The authors wish to thank two anonymous referees for their useful comments.

References

Bresnahan, T. F. “Duopoly Models with Consistent Conjectures.” American Economic Review 71 (No. 5 1981): 934-45.
Cheng, H. C., Magill, M., and Shafer, W. “Some Results on Comparative Statics under Uncertainty.” International Economic Review 28 (No. 2 1987): 493-507. [https://doi.org/10.2307/2526739]
Clarke, R. N. “Collusion and the Incentives for Information Sharing.” Bell Journal of Economics 14 (No. 2 1983a): 383-94. [https://doi.org/10.2307/3003640]
Clarke, R. N. “Duopolist Don’t Wish to Share Information.” Economics Letters 11 (Nos. 1-2 1983b): 33-6. [https://doi.org/10.1016/0165-1765(83)90158-1]
Dardanoni, V. “Optimal Choices under Uncertainty: the Case of Two-Argument Utility Functions.” Economic Journal 98 (No. 391 1988): 429-50. [https://doi.org/10.2307/2233376]
Feder, G. “The Impact of Uncertainty in a Class of Objective Functions.” Journal of Economic Theory 16 (No. 2 1977): 504-12. [https://doi.org/10.1016/0022-0531(77)90025-4]
Gal-Or, E. “Information Transmission-Cournot and Bertrand Equilibria.” Review of Economic Studies 53 (No. 1 1986): 85-92. [https://doi.org/10.2307/2297593]
Kim, Soojong, Kim, Iltae, and Ryu, Suyeol. “Left-side Relatively Strong Increases in Risk and Their Comparative Statics.” Seoul Journal of Economics 18 (No. 1 2005): 45-57.
Kirby, A. “Trade Associations as Information Exchange Mechanism.” The RAND Journal of Economics 19 (No. 1 1988): 138-46. [https://doi.org/10.2307/2555403]
Leland, H. E. “The Theory of the Firm Facing Uncertain Demand.” American Economic Review 62 (No. 3 1972): 278-91.
Li, L. “Cournot Oligopoly with Information Sharing.” The RAND Journal of Economics 16 (No. 4 1985): 521-36. [https://doi.org/10.2307/2555510]
Meyer, J., and Ormiston, M. “Strong Increase in Risk and Their Comparative Statics.” International Economic Review 26 (No. 2 1985): 425-37. [https://doi.org/10.2307/2526593]
Novshek, W., and Sonnenschein, H. “Fulfilled Expectations Cournot Duopoly with Information Acquisition and Release.” Bell Journal of Economics 13 (No. 1 1982): 214-18. [https://doi.org/10.2307/3003442]
Sakai, Y. “Information Sharing in Oligopoly: Overview and Evaluation. Part I. Alternative Models with a Common Risk.” Keio Economic Studies 27 (No. 2 1990): 17-41.
Sakai, Y. “Information Sharing in Oligopoly: Overview and Evaluation. Part II. Private Risks and Oligopoly Models.” Keio Economic Studies 28 (No. 1 1991): 51-71.
Sakai, Y., and Yamato, T. “Oligopoly, Information and Welfare.” Journal of Economics 49 (No. 1 1989): 3-24. [https://doi.org/10.1007/BF01227870]
Sandmo, A. “The Effect of Uncertainty on Saving Decisions.” Review of Economic Studies 37 (No. 3 1970): 353-60. [https://doi.org/10.2307/2296725]
Sandmo, A. “On the Theory of the Competitive Firm under Price Uncertainty.” American Economic Review 61 (No. 1 1971): 65-73.
Shapiro, C. “Exchange of Cost Information in Oligopoly.” Review of Economic Studies 53 (No. 3 1986): 433-46. [https://doi.org/10.2307/2297638]
Vives, X. “Duopoly Information Equilibrium: Cournot and Bertrand.” Journal of Economic Theory 34 (No. 1 1984): 71-94. [https://doi.org/10.1016/0022-0531(84)90162-5]