A Model-To-Model Analysis of Bertrand Competition

This paper studies a version of the classical Bertrand model in which consumers exhibit some strategic behavior when deciding from what seller they will buy. We use two related but different tools. Both consider a probabilistic learning (or evolutionary) mechanism, and in the two of them consumers\' behavior influences the competition between the sellers. The results obtained show that, in general, developing some sort of loyalty is a good strategy for the buyers as it works in their best interest. First, we consider a learning procedure described by a deterministic dynamic system and, using strong simplifying assumptions, we can produce a description of the behavior of the process. Second, we use finite automata to represent the strategies played by the agents and an adaptive process based on genetic algorithms to simulate the stochastic process of learning. By doing so we can relax some of the strong assumptions used in the first approach and still obtain the same basic results. It is suggested that the limitations of the first approach (analytical) provide a good motivation for the second approach (Agent-Based). Indeed, although both approaches address the same problem, the use of Agent-Based computational techniques allows us to relax hypothesis and overcome the limitations of the analytical approach while obtaining the same basic results.Agent-Based Computational Economics, Model-To-Model Analysis,

A model-to-model analysis of Bertrand competition

Financial support from the Spanish Ministry of Education and Science through grant SEJ2005-01481/ECON and FEDER, SGR2005-0712 of the Direcció General de Recerca (Generalitat of Catalonia), CONSOLIDER-INGENIO 2010 (CSD2006-00016), and CREA (Barcelona Economics) are gratefully acknowledged.This paper studies a version of the classical Bertrand model in which consumers exhibit some strategic behavior when deciding from what seller they will buy. We use two related but different tools. Both consider a probabilistic learning (or evolutionary) mechanism, and in the two of them consumers' behavior influences the competition between the sellers. The results obtained show that, in general, developing some sort of loyalty is a good strategy for the buyers as it works in their best interest. First, we consider a learning procedure described by a deterministic dynamic system and, using strong simplifying assumptions, we can produce a description of the behavior of the process. Second, we use finite automata to represent the strategies played by the agents and an adaptive process based on genetic algorithms to simulate the stochastic process of learning. By doing so we can relax some of the strong assumptions used in the first approach and still obtain the same basic results. It is suggested that the limitations of the first approach (analytical) provide a good motivation for the second approach (Agent-Based). Indeed, although both approaches address the same problem, the use of Agent-Based computational techniques allows us to relax hypothesis and overcome the limitations of the analytical approach while obtaining the same basic results

Product Differentiation and the Gains from Trade under Bertrand Duopoly

In the literature on the welfare effects of free trade under imperfect competition, one important case seems to have been overlooked and that is the Bertrand duopoly model with differentiated products. Although many authors have analysed the welfare effects of free trade under Cournot duopoly, and demonstrated the possibility of losses from trade, there has been no thorough analysis of the welfare effects of free trade under Bertrand duopoly. This paper presents a thorough analysis of the welfare effects of free trade under Bertrand duopoly with differentiated products, and it is shown that there are always gains from trade.gains from trade, Bertrand Oligopoly

Dynamic Assessment of Bertrand Oligopsony in the U.S. Cattle Procurement Market

The new empirical industrial organization approach with the Bertrand model is employed to measure the oligopsony market power in the U.S. cattle procurement market. The assumption of price competition (Bertrand model) based on the nature of cattle production such as cattle cycle and seasonality is used and compared to quantity competition (Cournot model). The empirical results show that the oligopsony market power exists in the U.S. cattle procurement market. The cattle cycle and seasonality affect the oligopsony market power and the cattle cycle causes the change of market power. However, concentration has a negative effect on the oligopsony market power.cattle cycle, concentration, market power, NEIO, oligopsony, seasonality, Agribusiness, Demand and Price Analysis, Industrial Organization, Livestock Production/Industries, Marketing, Q13, L13, L16,

Regulating quality by regulating quantity : a case against minimum quality standards

We show in a simple model of entry with sunk cost, that a regulator prefers limiting the output, or capacity, of the incumbent firm rather than imposing a "Minimum Quality Standard" in order to help the entrant to provide high quality. As a by-product, our analysis makes a contribution to the study of Bertrand-Edgeworth competition in a market with differentiated products.quality, minimum quality standards, price competition

Evaluating market pricing competition with the Bertrand Network

Mestrado de dupla diplomação com a UTFPR - Universidade Tecnológica Federal do ParanáRecently in the literature, there have been many attempts to expand classic models of market competition analysis. Considering firms are competing globally against many different sellers over different markets, recent works proposed a model where it is possible to represent competition among companies where they compete against each other directly and indirectly, using a hypergraph to represent the competition structure. This document presents an attempt to demonstrate how the young and maturing networked price competition model, which allows finding the best price for the companies from the competition structure and market sizes, can be used in any case of study. This work continues the recent demand to adapt the famous Bertrand competition model, where sellers ask for prices. Since there are no recent works which use the recent model, it has been presented how to use it in such a way that is possible to guess the competition structure and the distribution of the buyers by only by observing how companies are pricing. To better understand the applications of the existing method, the first real case of study which has used the Bertrand Network model is presented: a competition among 6 flight companies, where prices were collected by using the Google Flight tracking service, concluding that the proofs and claims developed in this work are useful to enhance market analysis

Bertrand competition in markets with network effects and switching costs

We analyze Bertrand duopoly competition in markets with network effects and consumer switching costs. Depending on the ratio of switching costs to network effects, our modelerates four different market patterns: monopolization and market sharing which can be either monotone or alternating. A critical mass effect, where one firm becomes the monopolist for sure only occurs for intermediate values of the ratio, whereas for large switching costs market sharing is the unique equilibrium. For large network effcts both monopoly and market sharing equilibria exist. Our welfare analysis reveals a fundamental conflict between maximization of consumer surplus and social welfare when network effects are large. We also analyze firms' incentives for compatibility and we examine how market outcomes are affected by the switching costs, market expansion, and cost asymmetries. Finally, in a dynamic extension of our model, we show how competition depends on agents' discount factors. --Network Effects,Switching Costs,Bertrand Competition

The incentives for takeover in oligopoly

"This paper presents a model of takeover incentives in an oligopolistic industry, which, in contrast to previous approaches, takes both insiders' and outsiders' gains from an increase in industry concentration into account. Our main application is to compare takeover incentives in a differentiated Cournot and Bertrand oligopoly model with linear demand and costs. We provide a complete analysis for arbitrary numbers of firms, complements and substitutes, and degrees of product differentiation. An increase in concentration is more likely under Cournot competition if products are complements and more likely under Bertrand competition if products are substitutes. Moreover, as products become closer substitutes, a takeover becomes more likely under Bertrand and less likely under Cournot competition." (author's abstract)"In dieser Arbeit wird ein Modell zur Analyse von Fusionsanreizen vorgestellt, in dem - im Gegensatz zu vorhergehenden Untersuchungen - sowohl die Gewinnzuwächse der an der Fusion beteiligten Firmen als auch die Gewinnveränderungen der Konkurrenzunternehmen die Übernahmewahrscheinlichkeit bestimmen. Die wichtigste Anwendung ist der Vergleich der Übernahmeanreize im Cournot- und Bertrand-Oligopol mit differenzierten Gütern und linearen Nachfrage- und Kostenfunktionen. Die Arbeit bietet eine vollständige Analyse für eine beliebige Anzahl von Unternehmen, komplementäre und substituierbare Güter und unterschiedliche Grade der Produktdifferenzierung. Eine Zunahme der Konzentration in einer Industrie ist wahrscheinlicher bei Cournot-Konkurrenz, wenn die Güter komplementär sind, und wahrscheinlicher bei Bertrand-Konkurrenz, wenn die Güter substituierbar sind. Des weiteren steigt (sinkt) die Übernahmewahrscheinlichkeit mit zunehmender Substituierbarkeit der Güter bei Bertrand-(Cournot-)Konkurrenz." (Autorenreferat

On Environmental Subsidy/Tax Policy with Heterogeneous Consumers: An Application of an Environmentally Differentiated Duopoly Model

We apply a model of an environmentally differentiated duopoly to the analysis of environmental policy in the form of a subsidy/tax on consumers based on emission levels of products. More specifically, we consider environmental and welfare effects of subsidizing consumers who purchase environmental-friendly goods such as hybrid vehicles. Focusing on types of market coverage by heterogeneous consumers, we examine the issue in the cases of a Bertrand and a Cournot duopoly. In the case of full market coverage with a Bertrand duopoly, an environmental subsidy improves the environment and is socially optimal. However, in the case of partial market coverage, irrespective of mode of competition, the optimal policy depends on the magnitude of the marginal social valuation of environmental damage. That is, if the marginal social valuation of environmental damage is sufficiently large (small), an environmental tax (subsidy) is optimal. Furthermore, in the Bertrand duopoly case, the effect of subsidy on the environment is ambiguous, whereas in the Cournot duopoly case, the subsidy degrades the environment.Environmentally differentiated product, Environmental subsidy/tax, Green market, Bertrand and Cournot duopoly

Regulating quality by regulating quantity: a case against minimum quality standards

We show in a simple model of entry with sunk cost, that a regulator is best advised to limit the output or capacity of the incumbent firm rather than impose a general Minimum Quality Standard in order to maximize industry welfare. The quota amounts to protect the entrant (or low quality firm) from price competition. As a consequence it becomes more profitable to sink money into quality upgrades. As a by-product, our analysis makes a contribution to the study of Bertrand-Edgeworth competition in a market with differentiated products that extends and confirms Krishna (1989) for our particular model of duopolistic competition