Summary Economics: Static Competition (Cournot and Bertrand)

EC3099 Units H & I: Static Competition: Cournot and Bertrand


Contents
1. Unit H: Game Theory Review and Cournot Competition 2
Game Theory Fundamentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Game Structure Components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Game Theory Assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Game Classifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Nash Equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Mixed Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Oligopoly Models Setup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Cournot Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

2. Unit I: Bertrand Competition and Market Power 7
Bertrand Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Bertrand with Capacity Constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Market Power Measurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Market Definition and Power Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Glossary 12

Notation and Symbols 13

Economic Models Reference Sheet 14




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, EC3099: Static Competition: Cournot and Bertrand Units H and I: Page 2


1. Unit H: Game Theory Review and Cournot Competition
Game Theory Fundamentals
Game Theory is a formal approach to modeling strategic behavior by a small number of decision-
makers where strategic interactions matter.
Key Properties:
• Strategic: Players take into account how their behavior affects others and vice versa
• Small number: Few enough players that strategic considerations matter significantly

Game Structure Components

Component Description

Players The decision-makers in the game

Rules Order of moves, possible actions, information structure

Outcomes Results for each possible combination of actions

Payoffs Expected utilities or profits for each outcome


Game Theory Assumptions

Assumption Meaning

Common Knowledge All players know the game structure and that others know
it too

Rationality Players maximize their own payoffs consistently


Game Classifications

Type Definition Characteristics

Static Game Single move per player Players move simultaneously, no time di-
mension

Dynamic Game Multiple moves Sequential decision-making with time di-
mension

Complete Information No private information All relevant information is publicly known