Implications of the Bertrand Model

There are different types of businesses, for example, some use monopolies, trust and pools, while other eliminate competition for higher prices. As stated in “Progressive reformers regarded regulation as a cure for all sorts of socioeconomic and political problems” , “The Sherman Act of 1890 attempted to outlaw the restriction of competition by large companies that co-operated with rivals to fix outputs, prices, and market shares, initially through pools and later through trusts” , meaning, competition is the

In Document 4 “A Call to Action,” by James B. Weaver, it explained to the public through the author's thoughts of that monopolies had too much power and that the monopolies destroy competition and trade. This book was written at the time of when big corporations were taking over and destroying competition. Also, the author goes into detail that they control the price of the raw material, so they can produce their products at a low price and sell it at a low price. By selling that the lowest price, the competitors can not compete are driven out of business or reduce the wages of the workers. This idea can be related to current times were big corporations, such as Walmart, are destroying competition because they lower their prices that the competitors cannot compete with.

2. (Price Leadership) why might a price–leadership model of oligopoly not be an effective means of collusion in an oligopoly?

In a monopolistically competitive industry, the goods sold, while not perfect substitutes, can be viewed as acceptable substitutes by most people. As a result, if Firm A raised the price of its good substantially, consumers would decrease the quantity demanded from Firm A and would move to other firms selling similar products. As a result, Firm A would sell few units at the new higher price. As the quantity a firm sells falls, so does its percentage of sales in the industry, also

Cartel - firms ,especially dominant players, gather together to set up a price according to the profit maximisation in the whole market. In this case, firms act like a monopoly. The price of products of each firms is fixed, thus reduction of price competition will be achieved. Instead of pricing strategy, firms will compete each other over non-price competition, for example, advertising. Like monopoly, customers’ interest might be sacrificed because price is constructed according to the market’s profit maximisation point, whole industry can gain abnormal profit, which means customers pay more than they actually need to. According to the figure 1, price of products under cartel is set up at P because of profit maximisation E (MC=MR), and abnormal profit is PP2FG. However, cartel is illegal in many countries, including UK.

“Price-fixing schemes are often negotiated in secret and can be very difficult to uncover, but an agreement can be discovered from "circumstantial" evidence” (Sonnefeld). An example, if a group of direct competitors have regular contact with an unexplained identical contract terms or price behavior together with other factors; such as no reason to have a meeting for legitimate business, unlawful price fixing may be the reason. (McDavid)

As illustrated by Sloman and Hinde (2007), an Oligopoly by nature has price stability, even when there has been no collusion between firms. This theory is based on two assumptions. For example, if Tate and Lyle were to lower their prices, British Sugar and the other rivals would feel the need to follow suit to prevent losing customers to Tate and Lyle. Contrastingly, if British Sugar raised their prices, Tate and Lyle would not follow suit. They would keep their prices the same and gain customers from British Sugar. The kinked demand model illustrates this.

One business decided to let their competition set their prices. And it had the potential of driving the company into bankruptcy.

In a perfectly competitive market each firm is a “Price Taker” , i.e. the prices and wages are determined by the market and the firm is so small relative to the size of the market that they can have no influence over the market price. For a market to be

Competition in economics is rivalry in supplying or acquiring an economic service or good. Sellers compete with other sellers, and buyers with other buyers. In its perfect form, there is competition among many small buyers and sellers, none of whom is too large to affect the market as a whole; in practice, competition is often reduced by a great variety of limitations, including monopolies. The monopoly, a limit on competition, is an example of market failure. Competition among merchants in foreign trade was common in ancient times, and it has been a characteristic of mercantile and industrial expansion since the Middle Ages. By the 19th century, classical economic theorists had come to regard

n perfectly competitive industries, there are such a large number of firms, each producing such a small proportion of the industry’s output, each firm cannot, by its own independent action, affect the supply or the price. The degree to which firms can influence the price of their product through their own strategy depends upon market structure. Perfectly competitive market structure is a market situation where there arelarge number firms producing a homogeneous productand there are large numbers of byers demanding the same products. In such a market every firm considers that it can sell any amount of output at the prevailing market price.Similarly, there is no restriction for the byers to purchase any amount from the

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

Joseph Bertrand developed his oligopoly model 45 years after Cournot. Bertrand was the first major challenge to the theory Cournot developed, he argued that Cournots model failed to show how prices were set and by whom, as under his model firms set quantities not prices and no mechanism is explicitly stated for determining pricing (Carlton & Perloff, 2005). Bertrand’s model like Cournot follows the basic assumptions of oligopoly listed above alongside these that there are two firms in the market (duopoly), they sell identical products (homogenous), constant marginal costs (MC), blockaded entry and most importantly of all the firm believes its rivals prices are fixed. Consumers in the market will have complete information and therefore will purchase from the firm with the lowest price, which means if a firm lowers its price

* If the Incumbent opts to fight, it may benefit from the Entrant’s higher unit cost and therefore still capture the entire market though at less profit margin. Since the willingness to pay for the Incumbent is $40 more than that for the Entrant, the former can fix any price at 40 more than whichever price fixed by the Entrant. So for any price fixed by the Entrant (Pe),the Incumbent’s price will be given by,

Competitions are ubiquitous. It may be in the form of us seeking a promotion at work, company competing for bigger market share. In fact, humans more often than not ,seek to achieve a superior position relative to others in a variety of contexts (Garcia, Tor and Schiff, 2013). Simply put, an undertaking with an aim of establishing gain by hindering the competitive edge of the rival party involved. In economic sense, in a marketplace, there are buyers and sellers for a product existing at variance, which would allow the price of products to change to counter the change in supply and demand. In todays times almost every product has a substitute alternative, hence, a buyer would have the convenience of switching to the cheaper alternative if price of a product becomes unaffordable for them. Hence, the buyers have relative influence on the price of the products. However in some industries there are only a few supplier of the products and services, due to the absence of substitutes, which reduces the bargaining power of the consumers on the price of goods, due to the producers having absolute power over the pricing of the goods.