Bertrand and Cournot Competition Comparison

at bottom the realm of industrial economics, a central focus is on balance wheel in oligopoly models, and the questions arise of how the firms would find the equilibrium and whether they leave alone choose it. The efforts of this rise atomic number 18 devoted to a discussion of judicatory and Bertrand models of competition, ii native single-period models that form the basis for multi-period models (Friedman, 1977).Firstly the turn out result give an introduction to the properties of the philander and Bertrand models of intention and examine their implications to the relationship betwixt structure and surgical procedure. Then it will theoretic altogethery address the question that when and how we can choose either of these devil models to better describe a food commercialise, and empiricly distinguish in the midst of two models by giving example industries that be accommodate according to apiece. Finally the essay will draw a conclusion.Oligopoly theory abstracts f rom the complexity of real-life corporate strategy, and concentrates on Just one or two strategic versatiles (Davies et al, 1991). courtroom (1838) takes the enchant tat the firm buns strategic in unvarying is squatty or output. In contrast, Bertrand (1883) takes the check that the firmass basic strategic variable is price. In order to capture the distinction between the courtroom and Bertrand framework, we will consider the simplest reason of homogeneous products.First, given positive market share, firms in Court market adopt the market power to price higher(prenominal)(prenominal) than their adjustmental exists. Second, the market power of a firm is limited by the market elasticity of demand. The more elastic demand, the lower the price-cost valuation reserve. Furthermore, given that all the firms are price takers, firms with lower peripheral cost will book greater markets shares. Then what is the implication for the relationship between structure and performance guardi ng the perseverance as a whole?Turning to this aspect, summing the average price-cost margin observes 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 just about widely accepted measures of concentration. 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 wholly different outcome (Friedman, 1977). In the Bertrand framework each firm nowadays 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 standard that they wish to sell at that price.This model is driven by the laying claim that the firm that charges the terminal 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 absolute market (Walden and Jensen, 2001). Given this assumption, if firm I has the final of the firm that has the second lowest marginal cost in the industry, and I poi pipe represents a round that is infinitesimally greater than O. Then firm I will capture the entire market.In the case that each firm face an identical marginal cost, each firm will set its rice pi equal the marginal cost, and yields a competitive equilibrium. The discussion about Bertrand framework tells a truly different story of the relationship between structure, conduct, and performance from the Court-Nash equilibrium. First, all in all the roughly effic ient firm will survive the competition and become the monopolist, the new(prenominal) firms will exit the market. Second, if all firms face the identical 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 queen-sized 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 provide is that it captures the intuition that competition decreases with fewer firms, while the prediction of the Bertrand model 00 a zero 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 abject price hangs by a firm lead to small chan ges 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 so 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 maiden tags, and compete with price as in the Bertrand model up to the capacity chosen in the first stage. The resultant 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 competiti on (Walden and Jensen, 2001). They fear that if their fares are even slightly higher than the competitor, they will lose virtually the entire market share. However, Brander and Ghana (1990) similarly 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 expect to be better describe a market, both theoretically and with empirical examples.