Industrial Structure: Game Theory and Cournot

Abstract

In the chapter the author uses Cournot’s game theory model to explain how producers can influence market price and market quantity. The global steam coal market is particularly suited to the Cournot model as it is neither a perfect competition nor a monopoly. In this analysis Cournot’s constant marginal cost assumption was relaxed to include increasing marginal cost and to discuss the impact on price and profits. The author concludes that market players have an incentive to continuously invest in production to make the marginal cost curve flatter. At the same time, investments increase barriers to entry and thus play a part in protecting a player’s market position. Players in an increasing marginal cost Cournot market are interested in a reduced number of market participants, thus resulting in consolidation. A more detailed analysis of the Cournot model is contained in Appendix G.