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 is now known as industrial economics, the book as a whole is not a precursor of modern industrial economics texts. Economists today would characterize the subject of the book as price theory (at the University of Chicago and like-minded places) or microeconomic theory (everywhere else).
The reference to wealth is a bit misleading, as it seems to suggest a treatment of saving and investment. For Cournot, what made something a source of wealth was the ability to exchange it in a market. Therefore, an individual´s wealth depends critically on the price he can receive for whatever he has to sell, hence the link between the reference to wealth in the title and the book´s focus on prices. Even if the reference to wealth in the title misleads modern readers, the reference to mathematics will not. The book is not highly sophisticated by modern standards in economics, but the treatment is most definitely mathematical. Readers comfortable with mathematics (i.e., most antitrust economists and some antitrust attorneys) will find the chapters republished in this issue to be a real pleasure. The chapters will be more of a challenge to those who are not fluent in mathematics (i.e., most, but not all, antitrust attorneys); but, as I try to explain in Section III of this paper, they are worth reading while skipping over the equations. Before turning to that explanation, I briefly address what, as an economist, I found most interesting.