Innovation,licensing, and price vs. quantity competition

In this paper, we develop a differentiated duopoly model with endogenous cost-reducing R&D and review the argument on welfare effect of price and quantity competition in the presence of technology licensing. We show that, with licensing, the standard conclusion on duopoly (Singh and Vives, 1984) is completely reversed. Cournot competition induces lower R&D investment than Bertrand competition does. Moreover, Cournot competition leads to lower prices, lower industry profit, higher consumer surplus and higher social welfare than Bertrand competition.     

Comparing Horizontal Mergers Under Cournot with Bertrand Competitions

Taking the product substitutability into account, this paper considers the horizontal mergers under Cournot with Bertrand competition. Firstly, the big market size indicates non‐intention to merge. Secondly, independent goods indicate indifferences between the quantity competition and price competition. Finally, firms under quantity competition are more willing to merge than under price competition. The antitrust authority is more inclined to approve the merger under quantity competition than that under price competition.     

Dynamic efficiency of Cournot and Bertrand competition: input versus output spillovers

We consider the efficiency of Cournot and Bertrand equilibria in a duopoly with substitutable goods where firms invest in process R&D that generates input spillovers. Under Cournot competition firms always invest more in R&D than under Bertrand competition. More importantly, Cournot competition yields lower prices than Bertrand competition when the R&D production process is efficient, when spillovers are substantial, and when goods are not too differentiated. The range of cases for which total surplus under Cournot competition exceeds that under Bertrand competition is even larger as competition over quantities always yields the largest producers’ surplus.     

Bertrand versus Cournot revisited

Summary. Bertrand criticized Cournot's analysis of the competitive process, arguing that firms should be seen as playing a strategy of setting price below competitors' prices (henceforth, the Bertrand strategy) instead of a strategy of accepting the price needed to sell an optimal quantity (the Cournot strategy). We characterize Nash equilibria in a generalized model in which firms choose among Cournot and Bertrand strategies. Best responses always exist in this model. For the duopoly case, we show that iterated best responses converge under mild assumptions on initial states either to Cournot equilibrium or to an equilibrium in which only one firm plays the Bertrand strategy with price equal to marginal cost and that firm has zero sales. Received: December 11, 1995; revised version October 2, 1996     

Price and Quantity Competition in a Differentiated Duopoly With Network Compatibility Effects

We consider the efficiency of price and quantity competition in a network products market, where we observe product compatibility with network externalities (hereafter, network compatibility effects). In particular, if network compatibility effects between firms are sufficiently asymmetric, the Cournot equilibrium is more efficient than the Bertrand equilibrium in terms of larger consumer, producer and total surpluses. Then, we consider an endogenous choice of the strategic variables, price and quantity. If the degree of network compatibility effects of the rival firm is larger (smaller) than the degree of product substitutability, then choosing prices (quantities) is a dominant strategy for the firm. Thus, if the network compatibility effects of both firms are larger (smaller), the Bertrand (Cournot) equilibrium arises. Furthermore, if the network compatibility effects between the firms are sufficiently asymmetric, the firm with a larger (smaller) network compatibility effect than a certain level of product substitutability chooses quantities (prices). In this case, the Cournot–Bertrand equilibrium arises, which is less (more) efficient than the Cournot equilibrium in terms of consumer (producer) surplus.     

Stakeholders’ relationships and product market competition

In this article, we study the relationships between main stakeholders (shareholders, consumers and employees) when firms are consumer oriented (CO) in the sense of caring about consumers’ interests in the objective function. We let these firms first bargain with labour union over their employees’ wages and then compete either in the quantity space (Cournot competition) or in the price space (Bertrand competition). Our model shows that taking care of the consumers’ interests when determining product market strategies may reverse the traditional ranking between Cournot and Bertrand equilibria. This implies that if shareholders in a CO firm can choose either a quantity or a price strategy, they will surprisingly choose the latter. Moreover, we show that the conflicting interests between main stakeholders are attenuated under Bertrand competition compared to Cournot competition.     

Incentives for sabotage in vertically related industries

We show that the incentives of a vertically integrated supplier to “sabotage” the activities of downstream rivals can vary with both the type of sabotage and the nature of downstream competition. Cost-increasing sabotage is typically profitable under both Cournot and Bertrand competition. In contrast, demand-reducing sabotage is often profitable under Cournot competition, but unprofitable under Bertrand competition. Incentives for sabotage can vary non-monotonically with the degree of product differentiation.      

Divisionalisation and Cournot Competition Yield Bertrand Outcomes

Bertrand and Cournot model are the main frameworks in the analysis of oligopolistic competition. The outcomes from them are however different. Using a simultaneous-move two-stage game, this article shows that, in a homogeneous product market with fairly general demand, the Bertrand outcomes can be achieved by a combination of divisionalisation and ensuing Cournot competition. This finding can be viewed as an extension to or complements of Kreps and Scheinkman (1983), who show that Cournot outcomes can be achieved by quantity precommitment and Bertrand competition.     

EXPORT SUBSIDIES, COST DIFFERENTIAL AND PRODUCT QUALITY

This paper presents a vertical product differentiation model to examine the relationship between optimal trade policies and product qualities for different export countries under Cournot quantity competition as well as Bertrand price competition. We can also use this quality model to explain why Japan as a high production-cost country may have incentives to offer high subsidies. This is a case that cannot be explained by the strategic trade theory models à la Brander and Spencer (1985) or Eaton and Grossman (1986).     

Mixed Competition and Patent Licensing

This paper studies the patent licensing decision of an insider patentee when two firms engage in a mixed (Cournot–Bertrand or Bertrand–Cournot) competition where one firm adopts the quantity strategy while the other uses the price strategy and vice versa. If either the fixed fee or royalty is applied, then the licensor prefers the fixed fee when the licensor takes the quantity strategy, while the licensee uses the price strategy (Cournot–Bertrand). If the two‐part tariff is applied, then the two‐part tariff is more likely to be adopted by the licensor under Cournot–Bertrand than under Bertrand–Cournot competition.     

Competition with Congestible Networks

We analyse competition between two network providers when the quality of each network depends negatively on the number of customers connected to that network. With respect to price competition we provide a sufficient condition for the existence of a unique pure strategy Nash equilibrium. Comparative statics show that as the congestion effect gets stronger quantities will decrease and prices increase, under both Bertrand and Cournot competition. In an example with endogenous capacities it turns out that equilibrium capacities are at first increasing and then decreasing in the strength of congestion. Furthermore, capacities are higher under Cournot competition. Welfare comparisons between Bertrand and Cournot competition are unambiguous for fixed capacities, but may turn around for endogenous capacities.     

Credence Goods,Misleading Labels,and Quality Differentiation

Due to differences in information disclosure mechanisms, consumer misinformation about the quality of many credence goods is more endemic at intermediate levels of the quality spectrum rather than at the extremes. Using an oligopoly model of vertical product differentiation, we examine how consumers’ overestimation of the quality of intermediate-quality products affects firms’ incentives to improve product quality. The firms non-cooperatively choose the quality of their product before choosing its price or quantity. Irrespective of the nature of second stage competition, Bertrand or Cournot, we find that quality overestimation by consumers increases profit of the intermediate-quality firm, and motivates it to raise its product’s quality. In response, the high-quality firm improves its product quality even further but ends up with lower profit. Overall, average quality of the vertically differentiated product improves, which raises consumer surplus. Social welfare increases when the firms compete in prices but falls when they compete in quantities.     

Biased managers with network externalities

In network industry under Cournot and Bertrand competition, we examine a model when owners of firms hire biased managers who have incorrect market demand. Contrast to previous studies, we show that (i) regardless of the strength of network externalities when consumers form the responsive and passive expectations, owners realize strategic advantage by hiring biased managers to be more aggressive under Cournot and Bertrand competition, (ii) firms prefer facing passive expectations for the weak network externalities and vice versa for the strong network exteranlities under Bertrand and Cournot competition, (iii) if the network size is sufficiently large, then the prisoner's dilemma that firms hire aggressive managers no longer exists under both competition modes. As with no delegation case, we obtain the different rankings of firms' profit depending on both network externalities and forming of expectations under Cournot and Bertrand competition.     

TO REGULATE OR TO DEREGULATE? THE ROLE OF DOWNSTREAM COMPETITION IN UPSTREAM MONOPOLY VERTICALLY LINKED MARKETS

This paper attempts to cast light to the effect of monopoly regulation in Cournot markets compared to its effect in Bertrand markets. To this purpose, we use a simple model of a vertically linked market, where an upstream regulated natural monopoly is trading via two‐part tariff contracts with a downstream duopoly. Combining our results to those of the existing literature on deregulated markets, we argue that when the downstream competition is in prices, efficiency dictates regulating the monopoly with a marginal cost based pricing scheme. However, this type of regulation leads to significant welfare loss, when the downstream market is characterized by Cournot competition.     

ENDOGENOUS TIMING AND STRATEGIC CHOICE: THE COURNOT‐BERTRAND MODEL

Cournot establishes a Nash equilibrium to a duopoly game under output competition; Bertrand finds a different Nash equilibrium under price competition. Both treat the strategic choice variable (output versus price) and the timing of play as exogenous. We investigate Cournot‐Bertrand models where one firm competes in output and the other competes in price in both static and dynamic settings. We also develop a general model where both the timing of play and the strategic choice variables are endogenous. Consistent with the conduct of Honda and Scion, we show that Cournot‐Bertrand behaviour can be a Nash equilibrium outcome.     

Are input prices irrelevant for make-or-buy decisions?

The 1996 Telecommunications Act requires incumbent providers to lease network inputs to rivals at cost-based prices in order to jump-start competition. Sappington (Sappington, D. (2005). American Economic Review, 95(5), 1631–1638) uses the Hotelling model to show that input prices are irrelevant for an entrant’s decision to make or buy an input required for downstream production. We show that this result depends upon the particular model of competition employed. Specifically, input prices are not necessarily irrelevant in the Bertrand vertical differentiation model and are not irrelevant in the Cournot model. It follows that departures from cost-based input prices may distort entrants’ make-or-buy decisions in settings of practical interest.      

Price and quantity competition under free entry

This paper complements that of Cellini et al. (Cellini, R., Lambertini, L., Ottaviano, G. I. P., 2004. Welfare in a differentiated oligopoly with free entry: A cautionary note. Research in Economics, 58:125–33.), which shows that Cournot competition may generate higher welfare compared to Bertrand competition in an economy with free entry. Unlike them, we provide a more general proof for this result and show that Cournot competition generates higher welfare compared to Bertrand competition when the products are sufficiently differentiated. If the products are close substitutes, welfare is higher under Bertrand competition. We show that these qualitative results hold whether or not number of varieties increases market size. We also show when the active firms earn higher profits under Bertrand competition compared to Cournot competition.     

ON COURNOT-BERTRAND MIXED DUOPOLIES*

This paper deals;with a situation where a quality-setting Cournot firm and a price-seeting Bertrand firm coexist in the same industry. Under a set of regularity conditions on demand and coast, we compute equilibrium prices on Cournot-Bertrand "mixed"duopolies, and compare them with those of "pure" Cournot and Bertrand duopolies.     

Comparing Cournot and Bertrand equilibria in an asymmetric duopoly with product R&D

We compare the Cournot and Bertrand equilibria in an asymmetric duopoly with product R&D competition. If a firm’s marginal cost is lower than that of its rival, then this firm (its rival) is referred to as the more (less) efficient firm. Under each mode of competition, there are three types of equilibria: blockaded-entry, deterred-entry, and accommodated-entry. Moreover, the presence of R&D investment makes it harder for the less efficient firm to survive. Cournot competition entails a unique equilibrium, whereas Bertrand competition may yield two equilibria. It is harder for the less efficient firm to survive under Bertrand competition than under Cournot competition. Versus Cournot competition, Bertrand competition yields higher industry output, and it shifts production from the less efficient firm to the more efficient firm. This result, together with the known size effect, explains the following three findings. First, the more efficient firm has a normal output ranking, whereas the less efficient firm may demonstrate an output reversal. Second, the more efficient firm may demonstrate a R&D reversal, whereas the less efficient firm has a normal R&D ranking (its Cournot R&D effort exceeds its Bertrand R&D effort). Third, Bertrand competition is more welfare-efficient than Cournot competition.