The basil’ difference between this model and the cournot model is that ill Cournot model. the output (and not the 111ice) of the rivul firm is assumed to remain unchanged. llcrc. the Rival firm is supposed tn keen unchanged. The following diagram illustrates the situation. It is assumed that each producers capacity is limited tu J/4th of his entire market and each is confronted with his own demand curve made up of one half of the consumers-The maximum output that A can produce is 013 und B can produce DB’, The demand curves or A and U respectively arc OT and DII. ,\ fir t enters the market and sets his price PI he sell thc total output aPI’ Then B enters thc market and ‘cll~ at 1’1ice slightly lower than A and thus lns market. U then sells the whole output at 1’2 and <natchcs from A hb’ of sales. Now A reducts and captures U”S market to the extent of CC’, This process of price-cutting. continues until one of thcm say B fixes hi~ price at P~. At this point can snatch the market from the other by lowering the price. Then lists the price hack to p, to maximise his profit from share of the market knowing that U has already thrown III~ entire supply. B then follows suit. There is thus continual oscillation of price between PI and “4 i.e. the upper and lower limits.
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