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9 - Nonmarket Interactions
- Edited by Mathias Dewatripont, Université Libre de Bruxelles, Lars Peter Hansen, University of Chicago, Stephen J. Turnovsky, University of Washington
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- Book:
- Advances in Economics and Econometrics
- Published online:
- 19 January 2010
- Print publication:
- 20 January 2003, pp 339-370
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Summary
INTRODUCTION
Why are there stock market crashes? Why is France overwhelmingly Christian and Thailand overwhelmingly Buddhist? Why did the Great Depression occur? Why do crime rates vary so much over time and space? Why did the adoption of hybrid corn follow an s-shaped curve? Why is there racial segregation? Why do mass cultural phenomena like the Hula Hoop and Harry Potter occur?
This bizarre juxtaposition of questions is bound together by one common element. Over the past 30 years, economists have suggested that models of social interactions provide the answer to every one of these questions. In most cases, the relevant social interactions are nonmarket interactions, or interactions between individuals that are not regulated by the price mechanism.
Many models of nonmarket interactions exhibit strategic complementarities, which occur when the marginal utility to one person of undertaking an action is increasing with the average amount of the action taken by his peers. Consequently, a change in fundamentals has a direct effect on behavior and an indirect effect of the same sign. Each person's actions change not only because of the direct change in fundamentals, but also because of the change in the behavior of their neighbors. The result of all these indirect effects is the social multiplier. When this social multiplier is large, we expect to see the large variation of aggregate endogenous variables relative to the variability of fundamentals that seem to characterize stock market crashes, religious differences, the Great Depression, wildly different crime rates, and the Hula Hoop.
9 - Quantity precommitment and Bertrand competition yield Cournot outcomes
- Edited by Andrew F. Daughety, University of Iowa
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- Book:
- Cournot Oligopoly
- Published online:
- 07 September 2009
- Print publication:
- 27 January 1989, pp 199-217
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Summary
Bertrand's model of oligopoly, which gives perfectly competitive outcomes, assumes that: (1) there is competition over prices and (2) production follows the realization of demand. We show that both of these assumptions are required. More precisely, consider a two-stage oligopoly game where, first, there is simultaneous production, and, second, after production levels are made public, there is price competition. Under mild assumptions about demand, the unique equilibrium outcome is the Cournot outcome. This illustrates that solutions to oligopoly games depend on both the strategic variables employed and the context (game form) in which those variables are employed.
Introduction
Since Bertrand's (1883) criticism of Cournot's (1838) work, economists have come to realize that solutions to oligopoly games depend critically on the strategic variables that firms are assumed to use. Consider, for example, the simple case of a duopoly where each firm produces at a constant cost b per unit and where the demand curve is linear, p = a–q. Cournot (quantity) competition yields equilibrium price p = (a + 2b)/3, while Bertrand (price) competition yields p = b.
In this article, we show by example that there is more to Bertrand competition than simply “competition over prices.” It is easiest to explain what we mean by reviewing the stories associated with Cournot and Bertrand.