Perfect Competition: Revisiting Bertrand and Cournot

As part of a discussion of models of competition through the spectrum from monopolies to perfect competition, undergraduate economics students are introduced to two stylised models of markets devised by Bertrand and Cournot. This paper compares the two models. In textbooks revenue maximization for each firm in a market is achieved by producing until marginal revenue equals marginal cost. Under the Bertrand model firms are price takers so firms produce up until the point that price equals marginal cost. Though often only mentioned in the context of duopoly models Cournot in fact consider any number of firms competing. Under the Cournot model, even in a perfectly competitive market ­ where it is implied that all value is captured if the number of firms competing is sufficiently large­ marginal revenue can never equal price. This is demonstrated mathematically and graphically.