Which of the Cournot and Bertrand Models of Oligopoly More Realistically Reflect Firm Behaviour?

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 or quantity this is due to intense competition and the relative small size of the firms, on the other hand there is a monopoly market where there is little or no rivalry and firms have control over the market.   Oligopoly is a state in-between perfect competition and monopoly where the firm can change its price or quantity but has to take into account competitors reactions to these changes to determine its own best policy (Carlton & Perloff, 2005).   It is argued that oligopolies are more realistic in the ‘real world’ as markets are often in-between the two extremes of perfect competition and monopoly.   A good example to show how oligopolies react is the cola market in America, the Coca-Cola co is planning on raising its price by five percent the question is how will the number two producer Pepsi-cola react?   Will it raise its price like Coca-Cola co or stay fast to try and gain market share (Cabral, 2000).   Oligopoly models try to explain these reactions/decisions and in this essay I will look at the Bertrand and Cournot models.

The Bertrand and Cournot models are both for analysing non-competitive oligopolies and for each of these models 5 strong assumptions are made (Oligopoly, online),  

1. Consumers are price takers
2. All firms produce homogenous products
3. There is no entry to the industry
4. Firms collectively have market power (so can set price above MC)
5. Each firm can either set its price or output (not other variables such as advertising)

These assumptions form the basis of both the Cournot and Bertrand... [continues]

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