Market Competition Models in Economics

Introduction

• Prerequisite Knowledge: Familiarity with market equilibrium, consumer and producer surplus.
• Focus: Understanding market situations beyond perfect competition: Bertrand, Cournot, and Stackelberg competition.

Key Concepts

• Perfect Competition: Efficient market outcome where quantity supplied equals quantity demanded.
• Deadweight Loss: Not present in perfect competition but can occur in other market structures.

Bertrand Competition

• Nature: Firms compete by setting prices.
• Assumptions:
  • Goods are perfect substitutes.
  • Firms have identical costs.
• Pricing Strategy: Firms set price at marginal cost to avoid being undercut.
• Outcome: Similar to perfect competition, with prices equal to marginal costs.

Cournot Competition

• Nature: Firms compete by setting quantities.
• Assumptions:
  • Goods are perfect substitutes.
  • Firms make decisions simultaneously.
• Pricing and Quantity:
  • Market sets prices.
  • Firms aim for higher than monopoly quantity but lower than perfect competition quantity.
  • Prices higher than perfect competition, lower than monopoly.
• Cartels:
  • Unstable due to incentive to produce extra units.
  • Cartel collusion can prevent Cournot outcomes but is difficult to maintain.

Stackelberg Competition

• Nature: Similar to Cournot but with sequential decision-making.
• First Mover Advantage: The lead firm chooses quantity first.
  • Gains more market share.
  • Known as the leader.
• Follower Dynamics:
  • Follower firms produce after the leader.
  • Both leader and followers produce quantities different from Cournot equilibrium.
• Outcome:
  • More competitive than Cournot.
  • Prices lower than Cournot equilibrium but higher than perfect competition.

Conclusion

• Further Reading: Articles in "Economics Terms A-Z" on Inomics.
• Educational Resources: Ready-made plans, handouts, and assessments available for deeper exploration.