COURNOT COMPETITION MODEL IN LOGISTICS

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Reading classmates’ posts makes me think about two things: First, I reflect upon logistics and shipment. As a second step, I wonder whether and how Cournot’s model can be applied to this case.

In my final thesis, I developed a model based on Cournot’s model which predicts the amount of production and the price in an oligopolistic market. With my knowledge about this model and the articles I have read, I realized that this could be applied to logistics.

Cournot competition is an economic model describing an industry structure in which competing firms that produce the same homogeneous and undifferentiated good choose a quantity to produce independently and simultaneously.

This model can be applied to address capacity competition in a source-destination trade route. For example, two shipping companies are opting to capture a still available volume of a trade route. The question is how much shipping capacity each of these companies should devote, having in mind that the competitor is ready to make a similar decision. Applying Cournot’s model provides us with the reaction functions for company A and B, respectively. They represent downward sloping curves, as the optimal supply for each company is negatively related to the expected level of supply of the other one. On the other hand, the solution of the model is given by Nash equilibrium, in which both companies have to be maximizing profits simultaneously (given the other company’s capacity supply), that is they must both be on their reaction curves. Thus, the reaction curves’ intersection corresponds to the unique Nash equilibrium for this model.

More info:

Cournot competition: http://en.wikipedia.org/wiki/Cournot_competition

Example of application of Cournot competition to a logistic case: http://www.palgrave-journals.com/mel/journal/v11/n2/full/mel20092a.html

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