Introduction to Chapters VII and IX of Augustin Cournot, Researches into the Mathematical Principles of the Theory of Wealth

Michael Salinger, Apr 24, 2008

In November 2007, the European Commission accepted a set of guidelines concerning its review of non-horizontal mergers. The section on conglomerate mergers contains a discussion of the possibility that merging firms will bundle their products together. It reads, in part: “When producers of complementary goods are pricing independently, they will not take into account the positive effect of a drop in the price of their product on the sales of the other product. Depending on the market conditions, a merged firm may internalise this effect and may have a certain incentive to lower margins if this leads to higher overall profits (this incentive is often referred to as the Cournot effect).” The Cournot to which this passage refers is Augustin Cournot, the nineteenth century French mathematician whose treatiseRecherches sur les principes mathmatiques de la thorie des richesses(Researches into the Mathematical Principles of the Theory of Wealth) was published in 1838.

The two chapters of the English translation of the book reprinted in this issue are the two that are most relevant for industrial economics and antitrust enforcement. The first of these chapters presents what is known as the Cournot oligopoly model. The second concerns pricing decisions by monopolist sellers of complementary products and is the basis for the Cournot effect referenced in the EC´s non-horizontal merger guidelines. While these chapters cover topics in what i