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Revisiting Cournot and Bertrand in the presence of income effects

Parenti, Mathieu and Sidorov, Alexander and Thisse, Jacques-François (2014): Revisiting Cournot and Bertrand in the presence of income effects.

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Abstract

The main purpose of this paper is to provide a detailed comparison of two types of oligopolistic competition: quantity competition (Cournot) and price competition (Bertrand) with or without Ford effect: strategic allowing for firm's impact on consumer's income. This is accomplished in a simple general equilibrium model where consumers are endowed with separable preferences. We show that without Ford effect Cournot competition always generates a higher markup than Bertrand competition. This reflects the folk wisdom, according to which Cournot competition is softer than Bertrand competition. Furthermore, as the number of competitors becomes arbitrarily large, both types of oligopolistic competition deliver the same equilibrium outcome. Allowing for Ford effect makes Cournot equilibrium undetermined in prices, while Ford-Bertrand symmetric equilibrium is sill unique, but may not exist when number of firms is not so large. If exists, Ford-Bertrand competition generates a higher markup than Bertrand competition without Ford effect. This reflects the idea that better knowledge implies more market power.

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