Modelling the Intensity of Competition

In this chapter we argue, using a simple model, that Cournot’s founding contribution to oligopoly theory should not be reduced to quantity competition but viewed instead as introducing a particular competitive conduct of the producers, between the two extreme conducts that will be singled out much later by Bertrand’s critique: collusion and pure price competition. We then analyse how producers can coordinate their conduct through “facilitating practices” of which the best-price guarantee is an example, and so implement Cournot’s regime of competition. As a second factor shaping the intensity of competition, we let producers differentiate their products either to attract different types of consumers or to respond to their taste for variety. When products are neither too-close substitutes nor too-close complements, the collusive regime may become enforceable, which was excluded in Cournot’s case of non-cooperative producers of a homogeneous good. The last factor we examine as a source of producers’ market power is concentration, looking at the way it varies with the number of firms in a symmetric context, and then how it varies with the dispersion of market shares.