MG_L4 (without extra slides) Flashcards
1
Q
What is the main focus of the lecture?
A
- Market competition models
- Cournot (quantity-setting) vs Bertrand (price-setting) duopolies
2
Q
What does the Cournot model assume?
A
- Firms simultaneously choose q1 and q2
- Market price p(Q) depends on Q = q1 + q2
3
Q
What are firms’ pay-offs in Cournot competition?
A
- Profit = (Price − Cost) × Quantity
- Example: if p(Q) = 1 − Q and cost = c per unit:
- Firm 1’s profit: (1 − (q1 + q2)) q1 − c q1
4
Q
What is the Cournot–Nash equilibrium?
A
- q1 = q2 = (1 − c)/3
- Total output: Q* = 2(1 − c)/3
- Price above cost, so firms earn positive profits
5
Q
Why might collusion be better for Cournot firms?
A
- Jointly reducing quantity raises price
- But each firm has a strong incentive to deviate from any collusive deal
6
Q
How does the Bertrand model differ?
A
- Firms set prices p1 and p2
- Consumers buy from the cheapest firm
- Identical goods → full market demand goes to the lower-priced firm
7
Q
What happens in the Bertrand model with identical products?
A
- Equilibrium price: p1 = p2 = c
- Firms earn zero profit (a ‘price war’)
8
Q
Why do prices fall to marginal cost in Bertrand?
A
- Each firm can undercut the other by a tiny amount
- Eventually, p = c is the only no-deviation outcome
9
Q
How do the two models compare?
A
- Cournot: Price > cost, positive profit
- Bertrand: Price = cost, zero profit
- Shows different forms of competition lead to different outcomes
10
Q
What resolves the ‘Bertrand paradox’?
A
- Add capacity constraints or product differentiation
- Different marginal costs or repeated interactions can keep prices above cost
11
Q
What are some policy implications?
A
- Collusion is profitable but not an equilibrium in one-shot play
- Mergers can reduce competition unless they yield efficiency gains
- Cournot and Bertrand inform how regulators view price vs quantity competition
