COURNOT AND BERTRAND COMPETITION UNDER SPATIAL DUOPOLY WITH ASYMMETRIC MARKETS
Abstract
Introduction. After the famous works of Cournot and Bertrand, economists have been comparing the advantages of quantitative (Cournot) and price (Bertrand) competition for more than a century. In the classical duopoly model, price competition drives prices down to the marginal cost level (Bertrand’s paradox). Consumers will benefit from this, while firms receive minimal profits. Therefore, within the framework of the classical model, firms prefer quantitative competition. It is possible to overcome the Bertrand paradox if other characteristics of real markets are introduced into the model, namely: product differentiation, dynamic interaction of firms, limitation of production capacities, spatial location of firms, etc. The purpose of this paper is to analyze the spatial duopoly model [Liang, W.J., Hwang, H., & Mai, C.C. (2006). Spatial discrimination: Bertrand vs. Cournot with asymmetric demands. Regional Science and Urban Economics, 36, 790-802] under conditions of homogeneous product, asymmetric markets and transport monopoly. In order to maximize profits, firms first select a location and then the type of competition – Cournot or Bertrand. The paper provides a comparative analysis of locations, profits, consumer surplus and social welfare depending on the markets asymmetry and types of competition. Results. In a state of equilibrium, firms will always choose different markets, regardless of the type of competition and the level of markets asymmetry. Under small market asymmetry, firms will choose Cournot competition. With increasing market asymmetry, there will be Bertrand-Cournot competition between firms, when one firm announces the price and the other – the volume of supply. Bertrand-Cournot competition will lead to the result of Bertrand competition. Conclusions. The paper shows that consumer surplus and public welfare are always higher in Bertrand competition, regardless of the markets asymmetry. This means that the interests of firms and consumers coincide when choosing the optimal locations for firms. However, the choice of the competition type for a relatively low level of markets size asymmetry may differ.
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References
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