Critically Discuss The Cournot, Bertrand, And Stackelberg Models Of Oligopoly

Theoretical Explanation of the models

Critically discuss the view that the Cournot, Bertrand and Stackelberg models of oligopoly are fundamentally flawed and are unable to explain recent events in the markets and industries.

Oligopoly market structure can be regarded as a market that upholds many buyers for buying goods with few numbers of sellers. Thus, no barriers in entry of the buyers existed in such kind of market. In this particular report, the overall description regarding the oligopoly market has been determined. The overall determinations have been progressed as per the assumptions of some models that have described the economic understanding concerning the oligopoly market. The overall explanation as well as detailed analysis of the Cournot’s, Bertrand’s, and Stackelsberg’s model has been accustomed in this particular report. Apart from this, the explanations as well as the assumptions regarding the three non-collusive models have been accustomed. Moreover, the overall analyses have been executed in respect of the certain equilibrium and mathematical equations (Estrin, et al., 2012). Nevertheless, the explanations regarding the flawlessness of the oligopoly market have also been accustomed to understand the economic activities in the market and the industry.

In this respective portion, the overall explanation regarding the models of oligopoly has been accustomed with probable diagrams as well as the graphs are as follows:

Cournot’s Model

The Cournot’s oligopoly can be described as delivering either separated or homogenous items. The fundamental hypothesis behind this model is the essential conviction by a firm that the association’s adversaries will keep up a consistent yield paying little heed to an adjustment in the company’s yield. In specific circumstances, an industry made up of only two firms might achieve a point known as Cournot’s harmony (Dimand and Dore, 1999). This is the place neither one of the firms is motivated to change its yield given the yield of the other firm. Every firm accept the opposition will not change their yield levels. Neither one of the models are equally good. The precision of the expectations of every model will differ industrywise, contingent upon the closeness of every model to the business circumstance. In the event that limit and yield can be effortlessly changed, Bertrand is a superior model of duopoly rivalry. On the off chance that yield and limit are hard to alter, then Cournot is for the most part a superior model.

In this particular section, the overall assumption regarding the oligopoly market has been determined and the respective assumptions have been followed:

Analysis regarding the models

p_1 = firm 1 price, p_2 = firm 2 price

q_1 = firm 1 quantity, q_2 = firm 2 quantity

c = marginal cost, indistinguishable for both firms

Equilibrium prices by assuming the model will be:

p_1 = p_2 = P (q_1+q_2)

Thus it can be implied that the profit for this has been calculated as Pi_1 = q_1 (P (q_1+q_2)-c).

Bertrand’s Model

Bertrand – Bertrand’s oligopoly again will have few firms and numerous clients with boundaries to section in existence for the vendors. Where a Bertrand oligopoly will vary from alternate models is in the cost of the items. In this model, all organizations inside of the business will create the same items at a steady negligible expense (Davidson & Deneckere, 2006). The organizations will then contend in cost and respond in view of contenders’ costs keeping in mind the end goal to expand benefits. The presumption is that shoppers will have idealized data on the items and there are no exchange costs. Any ware would be a decent illustration of the Bertrand oligopoly. Take aluminium for instance. It is utilized as a part of endless assembling applications. It is ordinarily purchased on contract in substantial amounts. Organizations are continually hoping to buy it at the least cost conceivable. In the event that another firm began offering aluminium at a lower expense than whatever other supplier did, they would in the end remove all the business from the contenders or power the contenders to bring down their cost to stay focused.

Stackelsberg’s Model

The Stackelberg’s oligopoly has the same essential attributes of alternate models; however, novel as in a pioneer and adherent relationship among firms is will exist. For this situation, a pioneer will decide their yield before some other firms set their yields. Thus, alternate firms the supporters decide their yields keeping in mind the end goal to boost their company’s benefits taking into account the pioneer’s given yields. For this situation, the pioneer will have a decent feeling of how the supporters will respond. Benefits will be accomplished for the pioneer and adherent, yet the pioneer ordinarily makes much higher benefits. A sample of this may be the point at which a service station changes the cost posted on the sign before the store. Alternate corner stores around the local area recognize what value that station the pioneer set for gas, so alternate stations can either coordinate the pioneer’s cost or contrast up or down to amplify their benefits.

The respective analysis has depicted the instances, which accustoms that the yield is more noteworthy with Cournot duopoly than imposing business model, however lower than flawless rivalry. Cost is lower with Cournot duopoly than imposing business model, yet not as low as with flawless rivalry. As per this model, the organizations have a motivating force to shape a cartel, adequately transforming the Cournot model into syndication. Cartels are typically illicit, so firms may rather implicitly conspire utilizing self-forcing procedures to decrease yield which, ceteris paribus will raise the cost and hence expand benefits for all organizations included. Albeit both models have comparative suppositions, they have altogether different ramifications: Since the Bertrand model expect that organizations contend on cost and not yield amount, it predicts that a duopoly is sufficient to push costs down to peripheral cost level, implying that a duopoly will bring about impeccable rivalry. Under a few conditions, the Cournot model can be recast as a two-stage model, where in the primary stage firms pick limits, and in the second, they contend in Bertrand style. Be that as it may, as the quantity of firms increments towards unendingness, the Cournot model gives the same result as in Bertrand model: The business sector cost is pushed to minimal cost level.

In diversion hypothesis, the Nash harmony is an answer idea of a non-helpful amusement including two or more players, in which every player is expected to know the balance techniques of alternate players, and no player has changing so as to anything to pick up just their own particular methodology (Giocoli, 2004). In the event that every player has picked a methodology and no player can advantage by changing procedures while alternate players keep their unaltered, then the present arrangement of technique decisions and the relating adjustments constitutes a Nash balance. The truth of the Nash balance of a diversion can be tried utilizing test financial matters techniques.

The Stackelberg as well as Cournot models are comparative on the grounds that in both rivalries is on amount. In any case, as seen, the principal move gives the pioneer in Stackelberg a significant favourable position. There is likewise the essential presumption of immaculate data in the Stackelberg amusement: the adherent must watch the amount picked by the pioneer, generally the diversion lessens to Cournot. With defective data, the dangers depicted above can be tenable. In the event that the supporter cannot watch the pioneer’s turn, it is no more silly for the adherent to pick, say, a Cournot level of amount indeed, that is the harmony activity. In any case, it must be that there is flawed data and the devotee cannot watch the pioneer’s turn since it is unreasonable for the adherent not to watch on the off chance that it can once the pioneer has moved. In the event that it can watch, it will generate the process with the goal that it can settle on the ideal choice. Any risk by the devotee asserting that it will not watch regardless of the fact that it can is as incredible as those above. This is a sample of an excessive amount of data harming a player. In Cournot rivalry, it is the synchronization of the amusement the defect of learning that outcomes in neither player being off guard. The total Stackelberg yield is more prominent than the total Cournot yield, however not exactly the total Bertrand yields. The Stackelberg cost is lower than the Cournot cost, yet more prominent than the Bertrand cost. The Stackelberg buyer surplus is more prominent than the Cournot purchaser overflow, yet lower than the Bertrand shopper excess is. The total Stackelberg yield is more prominent than immaculate imposing business model or cartel, yet not exactly the consummately focused yield. The Stackelberg cost is lower than the immaculate imposing business model or cartel cost, however more noteworthy than the consummately aggressive cost. The Bertrand model lays on some exceptionally great suppositions. For instance, it expects that buyers need to purchase from the least estimated firm. There are different reasons why this may not hold in numerous business sectors: non-value rivalry and item separation transport and hunt costs. The Bertrand model can be stretched out to incorporate item or area separation however then the principle result that cost is driven down to peripheral expense no more holds.

Conclusion

Thus from the overall assumptions as well as the analysis it can be said that there is a major motivating force to participate in the Bertrand model. Conspiring to charge the restraining infrastructure cost and sharing the business sector each is the best that the organizations could do in this set up. However not conspiring and charging minimal expense, is the non-helpful result and the main Nash harmony of this model (Ulph & Folie, 2010). On the off chance, that we move from a one-time amusement to a rehashed diversion, and then maybe arrangement can persevere for quite a while or develop. Therefore the overall purpose has settled down the fact that with inquiry costs, there might be other equilibrium separated from the focused cost regarding  the restraining infrastructure cost or even value scattering might be equilibrium as in the work of art.

References

Giocoli, N. (2004), “Nash equilibrium”, History of political economy, 36 (4): 639-666.

Dimand, R. W. and Dore, M. H. I. (1999), “Cournot, Bertrand and Game Theory: A further note”,American Economic Journal, 27 (3): 325-33.

Estrin, Dietrich and Laidler (2012), Microeconomics – Chapters 13 and 15.

Mazzeo, M. J. (2012). Product choice and oligopoly market structure.RAND Journal of Economics,221-242.

Davidson, C., & Deneckere, R. (2006). Long-run competition in capacity, short-run competition in price, and the Cournot model.The Rand Journal of Economics, 404-415.Ulph, A. M., & Folie, G. M. (2010). Exhaustible resources and cartels: An intertemporal Nash-Cournot model. Canadian Journal of Economics, 645-658.