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Bertrand and Cournot

The document compares and contrasts the Bertrand, Cournot, monopoly, and perfect competition models of oligopoly. The Bertrand model involves price competition between firms producing homogeneous goods, which leads to prices equaling marginal cost and zero economic profit. The Cournot model involves firms competing over output levels while believing competitors' outputs will remain constant, resulting in equilibrium output and price between the monopoly and perfect competition levels. Examples are provided to illustrate how to derive equilibrium outcomes under each model.

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164 views7 pages

Bertrand and Cournot

The document compares and contrasts the Bertrand, Cournot, monopoly, and perfect competition models of oligopoly. The Bertrand model involves price competition between firms producing homogeneous goods, which leads to prices equaling marginal cost and zero economic profit. The Cournot model involves firms competing over output levels while believing competitors' outputs will remain constant, resulting in equilibrium output and price between the monopoly and perfect competition levels. Examples are provided to illustrate how to derive equilibrium outcomes under each model.

Uploaded by

Lola
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Bertrand and Cournot

Bertrand Model
● Few firms (always the case for oligopoly)
● Homogeneous product
● Firms engage in price competition
● Consumer have perfect information
● Barriers to entry (always the case for oligopoly)
● Firms produce at constant MC
○ If you have a company that tries to gain market share by lowering its, the competition
will respond, and consumers will understand what’s going
○ Ultimately
○ P=MC
■ Firm1 price=Firm 2 price=MC
● Firms have ZERO economic π
Cournot Model
● Few firms (always the case for oligopoly)
● Differentiated and Homogeneous product
● Belief that competitors keep their output constant
○ They do no react to the actions of another firm
● Barriers to entry
● Reaction function
● Simultaneous
● Set MC=MR
Example: Market Demand

Duopoly— only 2 firms Marginal Cost for TC,is the derivative:MC₁= 8, MC₂=4
STEPS: ● REACTION FUNCTION
● Find reaction function FIRM 1
● Find E*Q for each firm
● Find E*P
● Find TR and π for
each firm
○ SET MR₁ = MC₁

FIRM 2

○ SET MR₂ = MC₂

● Find E*Q
● Find E*P

● Find TR and π

Cournot vs Monopoly and PC video


Cournot
Example: Oligopoly— Duopoly
Duopoly— only 2 firms Marginal Cost for TC,is the derivative:
STEPS: MC= ATC= $20
● Find reaction function ● REACTION FUNCTION
● Find E*Q for each firm
● Find E*P
● Find TR
● Find TC
● Find π for each firm

○
○ SET MR = MC

○ Because in this case both the firms have the exact


same cost information, the reaction function will be
the same except with the appropriate variable
substitution

● Find E*Q
● Find E*P

● Find TR,TC, and π


○ Total revenue for the market as a whole

Cournot
Example: Monopoly

Monopoly— only 1 firm Marginal Cost for TC,is the derivative


STEPS: ATC=MC= $20
● Find reaction function ● REACTION FUNCTION
● Find E*Q
● Find E*P
● Find TR
● Find TC
● Find π
● Find E*Q
○ SET MR = MC

● Find E*P

● Find TR,TC, and π

Cournot
Example: Perfect Competition

Duopoly— only 2 firms Marginal Cost for TC,is the derivative


STEPS: ATC=MC= $20
● P=MC ● P=MC
● Find E*Q
● Find E*P
● Find TR ● Find E*Q
● Find TC
● π=0

● Find E*P
● Find TR,TC, and π = 0

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