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Price competition and probabilistic demand yield the Cournot outcome, the Bertrand outcome, and much more

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  • Paolo Buccirossi

Abstract

In this paper we analyze a model of price competition in a market for a homogeneous product in which consumers express a probabilistic demand. A parameter, θ, describes the degree of precision with which consumers evaluate prices. We show that, according to the value of θ, the market can reach a very large set of symmetric equilibria. Both the Bertrand and the Cournot outcomes can emerge as equilibria of the game. In addition to these the price game can determine an equilibrium in which each firm charges the monopoly price without any cl. In the model a new entry can lead to both a decrease and an increase of the equilibrium price.

Suggested Citation

  • Paolo Buccirossi, 2001. "Price competition and probabilistic demand yield the Cournot outcome, the Bertrand outcome, and much more," Working Papers in Public Economics 41, University of Rome La Sapienza, Department of Economics and Law.
    • Handle: RePEc:sap:wpaper:wp41
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    References listed on IDEAS

    as
    1. Stiglitz, Joseph E, 1987. "Competition and the Number of Firms in a Market: Are Duopolies More Competitive than Atomistic Markets?," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1041-1061, October.
    2. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
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    Cited by:

    1. Paolo Buccirossi, 2003. "A Search Model Where Consumers Choose Quantity Based on Expected Price," Journal of Industrial Economics, Wiley Blackwell, vol. 51(4), pages 427-432, December.
    2. Kirui, Benard Kipyegon, 2013. "Reconciling Cournot and Bertrand Outcomes: A Review," EconStor Preprints 97305, ZBW - Leibniz Information Centre for Economics.
    3. Aitor Ciarreta & Javier García†Enríquez, 2018. "Profitable Strategic Delegation With Conjectural Variations," Bulletin of Economic Research, Wiley Blackwell, vol. 70(2), pages 185-203, April.

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    More about this item

    Keywords

    price competition; bounded rationality; Cournot; imperfect information; Bertrand.;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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