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
1
, 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
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
1
, 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
