Question

The Cournot and Bertrand models make dramatically different predictions about the quantities, prices and profits that will arise under oligopolistic competition. Explain the two ways of reconciling the two models.

Answer 1

The Cournot and Bertrand models make dramatically different predictions about the quantities ,prices and profits that will arise under Oligopolistic compeition.In the Cournot model the equilibrium price is above marginal cost . The Cournot equilibrium will reach the perfectly competitive equilibrium only when there is increase in the number of competitor in the market. In the Bertrand model ,competition between two firms will reproduce perfectly competitive equilibrium.The Cournot model is the long run competition and the Bertrand model is short run competition.The Cournot and the Bertrand models make different assumptions about how the rivals of the  firms will behave to their competitive moves . The Cournot firms makes assumption that the rivals will try to match the change in price made by the firm in order to maintain the constant sales volumes.But the Bertrand competitor is of the opinion that it can take over customers from its rivals by small reduction in their prices and that it has production capacity to meet the additional demand due to price cut.But if all firms believe in price reduction it will be able to take away customers from its competitors and thus prices will fall to marginal cost .