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Revisiting Cournot and Bertrand in the presence of income effects

Listed author(s):
  • Parenti, Mathieu
  • Sidorov, Alexander
  • Thisse, Jacques-François

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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File URL: https://mpra.ub.uni-muenchen.de/69641/1/MPRA_paper_69641.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 69641.

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Date of creation: 2014
Handle: RePEc:pra:mprapa:69641
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  1. Jaskold Gabszewicz, Jean & Vial, Jean-Philippe, 1972. "Oligopoly "A la cournot" in a general equilibrium analysis," Journal of Economic Theory, Elsevier, vol. 4(3), pages 381-400, June.
  2. Roberts, John & Sonnenschein, Hugo, 1977. "On the Foundations of the Theory of Monopolistic Competition," Econometrica, Econometric Society, vol. 45(1), pages 101-113, January.
  3. d'Aspremont, Claude & Dos Santos Ferreira, Rodolphe & Gerard-Varet, Louis-Andre, 1996. "On the Dixit-Stiglitz Model of Monopolistic Competition," American Economic Review, American Economic Association, vol. 86(3), pages 623-629, June.
  4. Bonanno, Giacomo, 1990. " General Equilibrium Theory with Imperfect Competition," Journal of Economic Surveys, Wiley Blackwell, vol. 4(4), pages 297-328.
  5. Seade, Jesus K, 1980. "On the Effects of Entry," Econometrica, Econometric Society, vol. 48(2), pages 479-489, March.
  6. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  7. Evgeny Zhelobodko & Sergey Kokovin & Mathieu Parenti & Jacques-François Thisse, 2011. "Monopolistic Competition in General Equilibrium: Beyond the CES," Discussion Paper Series DP2011-16, Research Institute for Economics & Business Administration, Kobe University.
  8. Behrens, Kristian & Murata, Yasusada, 2007. "General equilibrium models of monopolistic competition: A new approach," Journal of Economic Theory, Elsevier, vol. 136(1), pages 776-787, September.
  9. Joan Robinson, 1934. "What is Perfect Competition?," The Quarterly Journal of Economics, Oxford University Press, vol. 49(1), pages 104-120.
  10. Vives, Xavier, 1985. "On the efficiency of Bertrand and Cournot equilibria with product differentation," Journal of Economic Theory, Elsevier, vol. 36(1), pages 166-175, June.
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