Wednesday, July 20, 2011
Posted by D. Daniel Sokol
Laurens Cherchye, Catholic University of Leuven (KUL), Erasmus Research Institute of Management (ERIM), Thomas Demuynck, Catholic University of Leuven (KUL) - Campus Kortrijk (KULAK) - Subfaculty of Economics and Applied Economics, and Bram De Rock, Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) discuss The Empirical Content of Cournot Competition.
ABSTRACT: We consider the testable implications of the Cournot model of market competition. Our approach is nonparametric in that we abstain from imposing any functional specification on market demand and firm cost functions. We derive necessary and sufficient conditions for (reduced form) equilibrium market price and quantity functions to be consistent with the Cournot model. In addition, we present identification results for the corresponding inverse market demand function and the firm cost functions. Finally, we use our approach to derive testable restrictions for the models of perfect competition, collusion and conjectural variations. This identifies the conditions under which these different models are empirically distinguishable from the Cournot model.