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Explain Cournot, Bertrand and Stackelberg models of oligopoly assuming that the firms have identical costs. Describe circumstances where each model is appropriate.

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  • Essay length: 1258 words
  • Submitted: 05/12/2008
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University Degree Microeconomics

The first 200 words of this essay...

Explain Cournot, Bertrand and Stackelberg models of oligopoly assuming that the firms have identical costs. Describe circumstances where each model is appropriate.

The theory of the firm is a set of economic theories that describe the nature, existence and behaviour of a firm and its relationship with the market. Some of the questions it aims to answer are why firms enter or exit the market, why there are boundaries between the firm and the market, and why firms are structured in a specific way. An oligopoly is a common market form in which a market or industry is dominated by a small number of sellers. There are several different ways for firms to behave in an oligopolistic environment, and whereas the Stackelberg and Cournot models compete on quantity produced, the Bertrand model is based on price competition between firms.

Stackelberg

The Stackelberg model is a leadership game in which the leading firm makes the first move and the follower firms adjust their own product decisions accordingly. The total industry output is based on the output of the leader, y1 and that of the follower, y2. The profit maximising output of the leader depends on how the follower

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