Understanding Oligopoly Price competition and the Bertrand model French economist Joseph Louis Bertrand (1922-1900) The logic behind price competition is that when firms produce perfect substitutes and have sufficient capacity to satisfy demand when price is equal to marginal cost, then each firm will be compelled to engage in competition by Bertrand Model of Price Competition • A symmetric argument applies to the construction of the best response function of firm . Homogeneity of product. The Symmetric Bertrand Model in a Homogenous Good Market. § Firms’ decisions impact one another. OLIGOPOLY. Identical product. The Simplest Model of Price Competition in a Duopoly: The Bertrand Model. In some cases, competition in terms of price changes seems more logical than quantity competition, especially in the short run. § Many different strategic variables are modeled: – No single oligopoly model. – Duopoly - two firms – Triopoly - three firms § The products firms offer can be either differentiated or homogeneous. … Patrick Bajari Econ 4631 Oligopoly Models 29 / 55. • Pure oligopoly – have a homogenous product. Considering this, Bertrand proposed an alternative to Cournot.Considering Bertrand’s model from a game theory perspective, it can be analysed as a … Consumers always purchase from the cheapest seller. Two identical firms: 1,2. Competitionand Oligopoly: ACaseof Grocery Retailing Kevin A. Lawler Chih-Cheng Yang In this paper we develop a model of Bertrand price competition with uncertainty as to the number of bidders. Bertrand’s model leads to a stable equilibrium, defined by the point of intersection of the two reaction curves (figure 9.13). Simple model of threat: Limit pricing Incumbent E ntrant Don t fight Fight Stay Out (0,-F) (P (C),P (C)-F) (P(M), 0) Enter EC 105. Therefore, no single, uni ed model of oligopoly exists I Cartel I Price leadership I Bertrand competition I Cournot competition Managerial Economics: Unit 6 - Oligopoly4/ 45. COOPERATIVE BEHAVIOR: Cartel Cartel: A collusive arrangement made openly and formally 1 Oligopoly: Bertrand Model Bertrand model: There are two –rms and no entry is possible. Pure because the only source of market power is lack of competition. Bertrand Cournot versus Bertrand After these basic static models we will examine: Dynamic oligopoly and Self-enforcing Collusion Allan Collard-Wexler Econ 465 Market Power and Public Policy September 22, 2016 2 / 42. • Impure oligopoly – have a differentiated product. Constant Returns to Scale: Unit cost of production = c (for both firms). Single period. Unformatted text preview: Outline Cournot model of oligopoly Bertrand model of oligopoly Electoral competition War of attrition H. Eraslan (Rice) Strategic form games (2) Spring 2016, Econ 508 1/1 Example 1: Cournot model of oligopoly (Model) A single good is produced by n firms.The cost of producing qi units of the good for firm i is Ci (qi ). • This is the NE of the Bertrand model –Firms make no economic profits. • A mutual best response for both firms is Ὄ 1 ∗, 2 ∗Ὅ=Ὄ , Ὅ where the two best response functions cross each other. An example of a pure oligopoly would be the steel industry, which has only a few producers but who produce exactly the same product. Point e denotes a stable equilibrium, since any departure from it sets in motion forces which will lead back to point e at which the price charged by A … The auction models predict retail price dispersion as an observable feature of price discrimination. Oligopoly Theory Cournot Cournot wrote in 1838 - well before John Nash! 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