Single Market
Suppose that two countries, initially in autarky, decide to create a single market. For simplicity, assume that in both economies there is only one product. Demand for this product is given by D(i) = S(i) (a – p(i)) (for i = 1, 2), where S(i) is a measure of country i’s size. Upon the creation of a single market, total demand is given by the horizontal sum of the two initial demands.
Assuming there is free entry and that firms compete a la Cournot, determine the equilibrium number of firms in autarchy and after the completion of the single market. Interpret the results.