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 oligopoly models. How each firm reacts to the other can be analysed using non corporative game theory which is based on rational, decision making individuals who may not be able to fully predict outcomes from decisions made. The Bertrand and Cournot Oligopolistic games have three common elements (Carlton & Perloff, 2005),
1.There are two or more firms (players)
2.Each firm attempts to maximise its profits (payoff)
3.each firm is aware that other firms’ actions can affect its profits
Game theory is used to explain how firms react to each others actions and how they come to a Nash equilibrium which is where if holding the strategies of all other firms constant, no firm can obtain a higher payoff by changing their strategy. So in Nash equilibrium no firm wants to change their strategy. The Cournot and Bertrand oligopoly models can be interpreted using game theory even though they were developed long before it existed. These models are single period, which means they are single period or static games where firms compete once in the period and the market then clears one and for all. Because there is no repetition the opportunity for firms to learn about each other over time is non existent and is relevant for markets that last a brief period of time (oligopoly, online).
The Cournot model was developed by the French mathematician Augustin Cournot in 1838, the basic idea behind his model of non competitive oligopoly assumes that each firm acts independently and attempts to maximise its profits by choosing its output (quantity to produce). In the Cournot duopoly model there are several basic assumptions firstly that there are 2 firms in the market, entry into the market is blockaded, the products are homogenous and both firms have constant marginal costs which means that price and profit both depend on rival firms actions (Carlton & Perloff, 2005). The model works by working out the residual demand, which is the demand for firm A’s product given the...