Which of the Cournot and Bertrand Models of Oligopoly More Realistically Reflect Firm Behaviour?
2626 Words11 Pages
There is only one model for monopoly and one for perfect competition but in contrast to these oligopolies have several models to try to explain how they react, examples of these are the kinked demand curve, Bertrand and Cournot models. A non competitive oligopoly is ‘a market where a small number of firms act independently but are aware of each others actions’ (Oligopoly, Online). In perfect competition no single firm can affect price or quantity this is due to intense competition and the relative small size of the firms, on the other hand there is a monopoly market where there is little or no rivalry and firms have control over the market. Oligopoly is a state in-between perfect competition and monopoly where the firm can change its…show more content… The firm would be unwilling to produce at any point off of its best response curve as profits would suffer the only point both firms can achieve this is at Cournot equilibrium. The profits made under the Cournot model are above perfect competition but below the maximum they could be when collusion between firms exists (see fig4 in appendix) which is what encourages firms to collude. In summary the Cournot model shows how firms set there quantities based off what they think the other firm will do, which is the strategic element in the model (Carlton & Perloff, 2005).
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