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Revealed Preference Tests of the Cournot Model

Author

Listed:
  • James Fenske
  • John Quah
  • Andres Carvajal
  • Rahul Deb

Abstract

We consider an observer who makes a finite number of observations of an industry producing a homogeneous good, where each observation consists of the market price and firm specific production quantities. We develop a revealed preference test (in the form of a linear program) for the hypothesis that the firms are playing a Cournot game, assuming that they have convex cost functions that do not change and the observations are generated by the demand function varying across observations. Extending this basic result, we develop tests for the case where (in addition to changes to demand) firms' cost functions may vary across observations. We also develop tests of Cournot interaction in cases where there are multiple products and where cost functions may be non-convex. Applying these results to the crude oil market, we show that Cournot behavior is strongly rejected.

Suggested Citation

  • James Fenske & John Quah & Andres Carvajal & Rahul Deb, 2010. "Revealed Preference Tests of the Cournot Model," Economics Series Working Papers 506, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:506
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    Keywords

    Nonparametric test; Observable restrictions; Linear programming; Multi-product Cournot oligopoly; Collusion; Crude oil market;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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