{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

The leader has an advantage and uses it the nature of

Info iconThis preview shows pages 9–11. Sign up to view the full content.

View Full Document Right Arrow Icon
The Leader has an advantage and uses it. The nature of the relationship between the two players (a leader with more market power than the follower) is modeled here as a sequential game. It is that extra market power that give rise to higher profits for the leader. The other side of this relationship forces the weaker follower to accept lower profits than under Cournot. and Profits 22 , 2 2 , ( 4 ) 8 a c Vs.
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Chapter 13 –Oligopoly Slide 19 The Bertrand competition model The Bertrand oligopoly model Bertrand • Firms maximize profits Bertrand conjecture : Firms choose (the price or the quantity) assuming that other firm(s) keep their price fixed • Practical matter: easiest to define strategies as “prices” Difference Cournot model and Bertrand model: - conjecture how the game of competition is played • Solution will be radically different, however Chapter 13 –Oligopoly Slide 20 The Bertrand competition model Solution Bertrand model • Solution concept: Nash Equilibrium • THE ONLY solution: • Equilibrium payoffs are zero! Notes • With only two firms the outcome is the perfectly competitive outcome! • Solution is welfare maximizing c p p = = 2 1
Background image of page 10
Chapter 13 –Oligopoly Slide 21 Discussion: Cournot vs Bertrand Cournot Æ Cournot conjecture • Prediction: if few firms compete, they all make positive profits Bertrand Æ Bertrand conjecture • Prediction: even with few firms perfectly competitive market. No firm makes profits, even if there are a few Conclusion: Bertrand model Æ Bertrand conjecture seems more natural, however result is unrealistic! Defending Cournot • Assumption realistic if interpreting quantity as capacity • So new interpretation: first capacity choice, then price choice Defending Bertrand • Prediction of positive profits if there is collusion between firms • Prediction of positive profits if firms price often over time
Background image of page 11
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page9 / 11

The Leader has an advantage and uses it The nature of the...

This preview shows document pages 9 - 11. Sign up to view the full document.

View Full Document Right Arrow Icon bookmark
Ask a homework question - tutors are online