In 1893 French economist Joseph Bertrand developed his Bertrand model of competition from his review of Antoine Cournots study of a Spring Water duopoly. His criticism lay with how firms in oligopolies compete. In his model firms compete with prices rather than Cornots quantities. (REFERENCE TO SPANISH JOURNAL) The model consists of two firms who set prices simultaneously and independently (HUGH GRAVIELLE AND AY REES, MICROECONOMICES), jean tiral explains this as when one firm sets its price it is ignorant to its rival’s price, rather it “anticipates” what they will charge. It is assumed products are homogeneous and perfect substitutes (ECCSTRAT) and due to the nature of the product the firm supplying output at the lowest price will gain the entire market demand. (GB!) This firm will have to supply all the forthcoming demand at the price they have set; gb1 from this an important assumption of the model is that there are no capacity constraints, that both firms have the same marginal cost, which remains constant, and that demand is liner. GB2 As stated, the entire market demand for homogeneous products will go to the firm offering the lowest price, although if both firms were to sell at the same price “a sharing rule must be assumed” GB2. Using an example from the ((((((( lets suppose the market demand for a homogeneous product is given by, Q = 120-p (where Q is quantity demanded and p is price charged). The marginal cost (MC) for both producers is, C=$30, and both producers sell output at p=c=$30. The demand for each producer is Q=0.5*120-p=45. Lets say producer A increased their price to c=$31, the entire market demand would transfer to producer B who would now have a demand function of Qb=120-c=90, while producer A would have zero demand. However if producer A had reduced their price to c=$29, they would capture the entire market demand through charging the lowest cost, however they would make a $1 loss in each product sold. From this, the Nash equilibrium for the Bertrand model lies where P=MC, with demand so heavily influenced by price producers do not want to be undercut by rivals. With P=MC no rival will undercut as zero profits are preferable to negative profits, and any firm trying to charge above the MC and make positive profits will receive no sales. The suggestion is the addition of one firm restores perfect market competition (Jean Tirole, 1998), moving the market form monopoly power and profits (maximum inefficiency) to perfectly competitive (maximum efficiency). It had been deemed a paradox as it is difficult to believe that two firms in a duopolistic market can make zero profits. We are able to resolve Bertrand’s paradox through relaxing and of the three integral assumptions of the model (intro to industrial org l. M. B Cabrail). In order to analyse its practical relevance and its implications, this essay will now give examples of where the paradox can be deconstructed. The first example of a solution comes from a combination of two assumptions, the first is the absence of capacity constraints, and the second firms make decisions independently. In the model whichever firm firm is charging the lowest price will receive the entire market demand, and is “expected to supply all forthcoming demand at the price it has set” (old xavior). There are few situations in the real world where one firm could satisfy the demand of the whole market. Using the previous example, producer B gained the entire market demand (Q=120-$30=90). Let’s assume producer B has a capacity constraint below 90 units. There is now a proportion of the market that can only be satisfied by producer A, who can use monopoly power and make positive profits as the only producer. (managerial Economics a strategic approach). This example shows how with the inclusion of a common real world problem, Bertrand’s proposed equilibrium of price equal to marginal cost is deconstructed. A second implication of capacity constraints is their effect on...

...Introduction to the BertrandModel
The Bertrandmodel was developed by Joseph Bertrand to challenge Cournot’s work on non-cooperative oligopolies. Cournot’s model dealt with an N number of firms who will choose a specific quantity of output where price is a known decreasing function of total output. (About.com 2011) However, Bertrand’s argument was with regard to the setting of prices. He said the only...

...There is only one model for monopoly and one for perfect competition but in contrast to these oligopolies have several models to try to explain how they react, examples of these are the kinked demand curve, Bertrand and Cournot models. A non competitive oligopoly is ‘a market where a small number of firms act independently but are aware of each others actions’ (Oligopoly, Online). In perfect competition no single firm can affect price...

...|
Chembra Peak: The hills, rocks and valleys which contribute to the very unique character of Wayanad provide a lot for adventure tourism. Trekking to the Chembra peak is a risky mountaineering endeavour. Chembra peak, the highest hill in Wayanad, is near Meppady town. Trekking to the top of this peak takes almost a day. Tourists can also stay one or two days at the top of the peak in temporary camps. District Tourism Promotion Council provides guides, sleeping bags, canvases, huts and...

...Model: mont blanc mb425s 16a
19/05/2013 10:15
2 Items
Store
in Lingua Italiana
search …
Go
Home > Model: Mont Blanc MB425S-16A
Shop by Brand Glasses on Offer Eyeglasses list Sunglasses list RX Prescription Sunglasses Unisex glasses Male glasses Female glasses Junior glasses Rimless-Nylor Eyeglasses
BUY NOW WITHOUT RX LENSES
Model: MB425S-16A Mont Blanc Price: 250.99 GBP Colour: Size: Bridge: Temples:
16A(shiny palladium...

...equilibrium in oligopoly models, and the questions arise of how the firms would find the equilibrium and whether they will choose it. The efforts of this essay are devoted to a discussion of Cournot and Bertrandmodels of competition, two fundamental single-period models that form the basis for multi-period models (Friedman, 1977). Firstly the essay will give an introduction to the properties of the Cournot and...

...(George, 2011). Sister Calista Roy’s Adaptation Model is a system model that describes how a person continually interacts with environmental stimuli. The five major elements of her theory are adaptation, person, environment, health, and nursing. A person has behaviors that are either adaptive or ineffective. Roy’s theory links concepts and allows for middle range theory development. Roy viewed each concept that was derived from the adaptation model as...

...Capital Asset Pricing Model
Capital Asset Pricing Model (CAPM)
Capital market theory extends portfolio theory and develops a model for pricing all risky assets. It is an equation that quantifies security risk and defines a risk/return relationship
Capital asset pricing model (CAPM) will allow you to determine the required rate of return for any risky asset
Implications of the CAPM:
CAPM indicates what should...

...Michael porter’s five forces analysis is a frame work for industry analysis and business strategy development formed by Michael E Porter of Harvard business school in 1979.Five Forces model of Michael Porter is a very elaborate concept for evaluating company's competitive position.
Three of porters five forces refer to competition from external sources and the remainder are internal threats .porters referred to this forces are micro environment to contrast it with more...

1520 Words |
5 Pages

Share this Document

Let your classmates know about this document and more at StudyMode.com

## Share this Document

Let your classmates know about this document and more at StudyMode.com