Bertrand and Cournot Competition Comparison

Within the realm of industrial economics, a central focus is on equilibrium in oligopoly exemplars, and the wonders arise of how the steadfasts would find the equilibrium and whether they impart choose it. The efforts of this essay are devoted to a interchange of butterfly and Bertrand models of competition, devil 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 motor lodge and Bertrand models of intention and examine their implications to the relationship betwixt structure and performance. thusly it will theoretically address the question that when and how we contribute choose either of these two models to better describe a grocery, and existentially distinguish between two models by giving example industries that behave accord to each. Finally the essay will capture a conclusion.Oligopoly theory abstracts from the complexity of real-life corporate strateg y, and c erstwhilentrates on Just one or two strategical variables (Davies et al, 1991). act (1838) takes the view tat the firmass strategic variable is squatty or output. In contrast, Bertrand (1883) takes the view that the firmass basic strategic variable is price. In order to capture the tubercle between the Court and Bertrand manikin, we will consider the simplest case of homogeneous products.First, assumption positive market share, firms in Court market have the market office to price higher than their allowanceal costs. Second, the market power of a firm is limited by the market elasticity of demand. The more elastic demand, the lower the price-cost margin. Furthermore, given that all the firms are price takers, firms with lower marginal cost will have greater markets shares. whence what is the implication for the relationship between structure and performance guarding the industry as a whole? round to this aspect, summing the average price-cost margin equals summing individuals firms over all n firms weighting each firmass margin by its share of the market, Where H denote Heralding index, which is one of the most widely accepted measures of denseness. If we use concentration as the measure of industry structure and price-cost margin as the measure of performance, we can see that in Court competition, the less elastic is demand, and the larger is the Heralding index, the greater aggregate margin in the Court Nash equilibrium.Also, the market power (Unmans, 1962)), this indicates the importance of barriers to entry. In 1883, Bertrand criticized Courtass work on several counts. One of these was that if the strategic variable is price rather than quantity, Courtass logic results in an entirely diverse take (Friedman, 1977). In the Bertrand framework each firm directly controls the price at which it sells it output, and the demand for its output will depend on the price set by each firm 3 and the amount that they appetite to sell at that price.T his model is driven by the assumption that the firm that charges the utmost price can capture marginal cost in the market, it can charges a price I pi?ii = I pi?ii pi?ii pi?ii pi?0 00 I poi pipe, where c is the marginal cost the entire market (Walden and Jensen, 2001). Given this assumption, if firm I has the lowest of the firm that has the min lowest marginal cost in the industry, and I poi pipe represents a number that is infinitesimally greater than O. Then firm I will capture the entire market.In the case that each firm face an kindred marginal cost, each firm will set its rice pi equal the marginal cost, and yields a agonistical equilibrium. The discussion about Bertrand framework tells a very different story of the relationship between structure, conduct, and performance from the Court-Nash equilibrium. First, only the most efficient firm will survive the competition and become the monopolist, the opposite firms will exit the market. Second, if all firms face the identic al marginal cost, with two or more firms the competitive outcome occurs, large numbers (which is the case in Court competition) are not necessary.Clearly, there is a big difference whether the strategic variable is price or quantity. Therefore, what criteria do we have for choosing between Court or Bertrand model to describe a market? A common argument for the Court model is more appropriate is that it captures the intuition that competition decreases with fewer firms, while the prediction of the Bertrand model 00 a slide fastener price-cost margin with two or more firms, or only one firm exists as the monopolist 00 is implausible.In the world, examples like many consumer goods markets have shown that it is hard to find all consumers want to buy from the firm charging the lowest price, and small price hangs by a firm lead to small changes in its sales and in the sales of its rivals (Friedman, 1977). Also, it is often argued that the choice of Court and Bertrand lies in the relative flexibility of prices and output. In the Court framework, once chosen, outputs are fixed, while the price is flexible.In the Bertrand framework, however, firms set prices while output is 4 quantities (Davies et al, 1991), and therefore the Court framework is preferred to the Bertrand framework. An influential work coloring this view is Krebs and Chainman (1983). In their two-stage model, firms choose capacities in the first tags, and debate with price as in the Bertrand model up to the capacity chosen in the first stage. The consequent equilibrium turns out to be equivalent to the standard Court model.There do have some industries where firmass behavior is consistent with the intuition of Bertrand model. In the American airline industry, many major carriers follow a policy of pricing near marginal cost on routes on which it faces competition (Walden and Jensen, 2001). They veneration that if their fares are even slightly higher than the competitor, they will lose virtually the e ntire market share. However, Brander and gold coast (1990) also found evidence that the pricing behavior of American Airlines and United Airlines between 1984 and 1988 were close to the Court modelass prediction.In addition, Await (1974) found that in the Japanese flat-glass industry the two duopolistic behave according the the Court competition. In conclusion, this essay has compared and contrasted the main properties of Court and Bertrand models of competition, clearly the two models tell completely different stories of oligopolies competition as well as the relationship between structure and performance. The essay has also discussed when and which of the two oodles are expected to be better describe a market, both theoretically and with empirical examples.