Cournot’s Theory of Competition
In the second essay, Dmitriev critically examined Cournot’s theory of competition and made some steps towards the development of a theory of competition with strategic interaction.
He anticipated some elements of Chamberlin’s approach to imperfect competition theory and showed that a homogeneous oligopoly has a determinate solution which corresponds to an implicit collusion (Schutte 2003: 160-72). The starting point of his argument is the observation that Cournot’s analysis, in which each seller is supposed to seek a “temporary profit” (Cournot’s “benefice momentane”) from expanding his individual output until in equilibrium price equals marginal costs (or costs of production), is based on the assumption that other sellers cannot react immediately by increasing their market supplies. Rejecting this premise, Dmitriev argued that in competitive conditions producers will hold inventories and/or excess capacity for strategic reasons, that is, as a threat to competitors (1974: 148). Dmitriev indeed provided the same explanation for (implicit) cooperative behaviour as modern game-theoretic approaches to oligopoly theory. In fact, by separating the producers’ decisions on production from those on sales (by means of inventories or excess capacities), he introduced sunk costs and a two- step recursive solution procedure, in precisely the same way as in sequential games for oligopolistic markets of the 1970s and 1980s (for example, Spence, Dixit, Rotemberg).