The Axioms of the Theory of Prices
Cournot (1877 [1982]: 91) considers his theory of prices as his main contribution to economic theory. He breaks with his predecessors not only because he uses mathematics and proposes new tools, but also because his approach is different.
The classics viewed monopoly as an exceptional case. For Cournot, instead, it is a point of departure to study duopoly and “infinite” competition.For what concerns the theory of value, Cournot refers to “only one axiom... that everybody tries to get the greatest possible value from his thing or labour” (1838 [1980]: 35). He applies this axiom to explain the behaviour of producers who want to maximize their profits, but he refuses to use it as regards the demand for commodities or to estimate the benefit an individual gets from exchange: “there is nothing in common between the feeling of pleasure or pain and the mathematical notion of quantity in mathematics” (1851 [1975]: 233).
However, the axiom that anybody tries to get the maximum income from his or her resources is not Cournot’s sole hypothesis. He affirms many times the principle of the uniformity of a price, which originates in the very notion of market understood as “the whole territory, the parts of which are united through free trade, so that prices are easily and quickly levelled” (Cournot 1838 [1980]: 40).
Cournot’s framework is partial equilibrium, justified by the “principle of compensation”. While it is true that “the economic system is an entity, the parts of which are linked together and act on each other” Cournot 1838 [1980]: 99), yet it is possible, as a first approximation, to abstract from such effects. Suppose that the production of a good diminishes from D0 to D1, and that its price increases from p0 to p1. The revenue of its producers changes from p0D0 to p1D1.
Despite the rise in price, some consumers maintain their demand, but the new price reduces their income, available to buy the other goods, of an amount equal to (p1 - p0)D1. Some other consumers instead stop buying the good and spend the sum saved p0(D0 - D1) to buy other commodities. Globally, Cournot writes, the income effect is nil. “Thus, when we consider the totalities of the producers and the consumers of the good in question, one finds that the same annual sum is available for the demand for all the other goods” (ibid.: 101). It is thus possible that this sum will be spent as before, among the other commodities, and that their prices will not change. Such a possibility is however exceptional and Cournot recognizes that the prices of the other commodities will change, but the consequence on the good, which initially was subject to the first change, will only be of a second order and can be ignored in a first approximation.To analyse the formation of prices, Cournot’s approach is the same for monopoly, duopoly or “infinite” competition: the seller(s) fix(es) the price. This point has been long discussed (Magnan de Bornier 1992, 2000, 2001; Morrison 2001). It is effectively possible to think that, after having supposed that a monopolist firm fixes the price of the good it produces, Cournot also supposes that, for other forms of markets, the quantity produced is the strategic variable while the price is determined by supply and demand. In fact, when he deals with duopoly, he does not reason on the demand function but on the reciprocal function. However, Cournot (1838 [1980]: 60; 1863 [1981]: 73) explicitly states that each entrepreneur fixes the volume of his sales “in changing adequately the price”. The entrepreneur supposes the production of his competitor as given and reasons like a monopolist; at the same time he sees him facing the residual - and not the total - demand. When we read that “firms form conjectures a la Cournot”, it is not pretended that firms take the quantities, and not prices, as the decision variable. To make a conjecture a la Cournot means that the entrepreneur supposes that his competitors will not change the quantities of the goods they sell if he changes the price.