Free Economics Dissertations - Discuss, Explain And Analyse The View That The Cournot, Bertrand And
Discuss, explain and analyse the view that the Cournot, Bertrand and Stackelberg models of oligopoly are fundamentally flawed.
Introduction
The Cournot, Bertrand and Stackelberg models, commonly known as the ‘conjectural variations’ models, intend to explore the behaviour of firms in an oligopolistic market structure. During the course of this essay I shall outline the basic framework of each model and present an overview of their most significant limitations. In addition I shall compare and contrast the models and provide examples of how economists have subsequently developed them. None of the models realistically explains firm behaviour over time, nor do they consider collusive theory. In this sense it can be argued that the models are fundamentally flawed. However, the Cournot model has made a significant contribution to both oligopoly theory and noncooperative game theory, whilst the Bertrand and Stackelberg models have successfully overcome various limitations in the original Cournot model. One can also find evidence of the application of conjectural variations models in areas as diverse as environmental policy and welfare economics.
Assumptions
An oligopoly is characterised by very few firms controlling the market, for example the United Kingdom supermarket industry. Each model which is studied in this paper shares the common assumptions that firms operate in an oligopoly, in which there are barriers to entry (factors which prevent other firms entering the market) and no exit of existing firms. There exists strategic behaviour, in which one firm will be concerned about the behaviour of other firms in the market. A key assumption is that of noncooperation; firms will not collude to maximise joint profits. Consumers are assumed to have complete information i.e. they are aware of all firms and their prices and view products as homogeneous (identical). It is also assumed that they do not face transportation costs. Thus a consumer’s choice of product is solely determined by its price. One should note that with the exception of strategic behaviour, none of these assumptions may hold in a typical oligopolistic market.
The models are distinguished from each other by two factors: the decision variable (the variable which firms are competing on) and/or the timing of firms’ actions. Each model assumes that a firm cannot set both price and quantity. In the Cournot and Stackelberg models, the decision variable is quantity, whereas the Bertrand model presents price as the decision variable. With regard to timing, we could treat each model as a one-period game, in which the firms are the ‘players’ and their ‘moves’ are either setting price or quantity, as dictated by the specifications of the model. Therefore, in the Cournot and Bertrand models, the firms move simultaneously whereas in the Stackelberg model there is one leader and other firms are presented as followers.
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