Which is better Bertrand or Cournot?

Vives (1985) and Singh and Vives (1984) found that Bertrand competition results in higher consumer surplus, lower profits and higher overall welfare than Cournot competition in a duopoly model where goods are substitutes and the firms’ only choice variable is either price or output.

Is Bertrand or Cournot more realistic?

The accuracy of each model depends on how well it imitates the industry in question; Bertrand will be better if capacity and output can be easily changed (firms are competing on price) whilst Cournot is generally better if output and capacity are difficult to adjust (and firms are competing on quantity).

Do consumers prefer Cournot or Bertrand?

Lower prices and higher quantities are always better in welfare terms. Consumer surplus is decreasing and convex as a function of prices. Therefore, in term of consumer surplus, the Bertrand equilibrium dominates the Cournot equilibrium as proved in equation (15).

Why did Bertrand criticized the Cournot model?

Bertrand criticized Cournot’s analysis of the competitive process, arguing that firms should be seen as playing a strategy of setting price below competitors’ prices (henceforth, the Bertrand strategy) instead of a strategy of accepting the price needed to sell an optimal quantity (the Cournot strategy).

Is Bertrand competition good for firms?

Bertrand competition is a model of competition in which two or more firms produce a homogenous good and compete in prices. Theoretically, this competition in prices, providing the goods are perfect substitutes, ends with the firms selling their goods at marginal costs and thus making zero profits.

What is an example of Bertrand oligopoly?

An example of a Bertrand oligopoly comes form the soft drink industry: Coke and Pepsi (which form a duopoly, a market with only two participants). Both firms compete by changing their prices based on a function that takes into account the price charged by their competitor.

Is Bertrand competition efficient?

Bertrand competition has traditionally been considered as more efficient in welfare terms than Cournot competition because it leads to lower prices and larger quantities (see for example Shubik, 1980, Vives, 1985, Singh and Vives, 1984).

What is the difference between Cournot model and Bertrand model?

In the Cournot model, firms control their production level, which influences the market price, while in the Bertrand model, firms choose the price of a unit of product to affect the market demand.

What are the assumptions of the Cournot and Bertrand model?

Cournot and Bertrand focused on different details of the competitive process, and were led to specify different mechanisms by which individual consumers’ demands are allocated among competing firms: Cournot assumed that the market allo- cates sales equal to what any given firm produces but at a price determined by what …

What is the difference between Bertrand model and Cournot model?

Answer: Bertrand is a model that competes on price while Cournot is model that competes on quantities (sales volume).

What is Cournot’s model of competition?

Cournot Competition: Is a model (Oligopoly the model was built on Duopoly) where a firm competes in the Oligopoly market on quantity, maximizing profit given what it believes the other firm(s) will produce. Profit for the firm is maximized by setting its marginal revenue equal to marginal cost and determining it’s quantity relative it’s rival.

What is the basic concept of Bertrand competition?

Bertrand Competition describes an industry structure (i.e. an oligopoly) in which competing companies simultaneously (and independently) chose a price at which to sell their products. The market demand at this price then determines quantity supplied. As a result, each company has to consider the expected price of their competitors’ products.

What happens when price equals marginal cost in Bertrand competition?

They will repeat this process, until they reach a point where price equals their marginal costs. Therefore, in Bertrand competition the market ultimately reaches an efficient equilibrium, where price is equal to the price in perfect competition and the firm’s don’t earn economic profits.