Bertrand and Cournot Competition Comparison

1677 Words Aug 12th, 2013 7 Pages
Industrial Economics: Market Structure Individual Assignment 1

Student Name: Yibo, Shen Student ID: 1051698 Question Number: 1

Within the realm of industrial economics, a central focus is on equilibrium in oligopoly models, and the questions arise of how the firms would find the equilibrium and whether they will choose it. The efforts of this essay are devoted to a discussion of Cournot and Bertrand models of competition, two fundamental single-period models that form the basis for multi-period models (Friedman, 1977). Firstly the essay will give an introduction to the properties of the Cournot and Bertrand models of competition and examine their implications to the relationship between structure and performance. Then it will
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Recall that:

And its first-order condition for a maximum is:

According to the Cournot conjecture (

í µí¼•í µí¼•í µí¼‹í µí¼‹í µí±ží µí±ž í µí¼•í µí¼•í µí±ƒí µí±ƒ = . í µí±ží µí±ží µí±ží µí±ž + í µí±ƒí µí±ƒ − í µí±í µí±í µí±ží µí±ž = 0 (eq. 4) í µí¼•í µí¼•í µí±ží µí±ží µí±ží µí±ž í µí¼•í µí¼•í µí±ží µí±ží µí±ží µí±ž dqi right-hand side and divide both sides by P, we can rewrite this equation and find the price-cost
2

= 1),

dqi

dP

=

dQ

dP

. In eq.4, if we move

í µí¼•í µí¼•í µí±ží µí±ží µí±ží µí±ž

í µí¼•í µí¼•í µí±ƒí µí±ƒ

. í µí±ží µí±ží µí±ží µí±ž to the

margin as

Where Si is the firm’s market share, and í µí±†í µí±†í µí±ží µí±ž = ; and e is the absolute value of the elasticity í µí±ží µí±ží µí±ží µí±ž í µí±„í µí±„

í µí±ƒí µí±ƒ − í µí±í µí±í µí±ží µí±ž âˆ’í µí±‘í µí±‘í µí±ƒí µí±ƒ í µí±„í µí±„ í µí±ží µí±ží µí±ží µí±ž í µí±†í µí±†í µí±ží µí±ž (eq. 5) = . . = í µí±ƒí µí±ƒ í µí±‘í µí±‘í µí±„í µí±„ í µí±ƒí µí±ƒ í µí±„í µí±„ í µí±’í µí±’

of market demand.

Based on eq.5, we can make several observations of the properties of Cournot competition. First, given positive market share, firms in Cournot market have the market power to price higher than their marginal costs. Second, the market power of a firm is limited by the market elasticity of demand. The more elastic demand,
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