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Bertrand, the Cournot Paradigm and the Theory of Perfect Competition

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  • Leo K. Simon

Abstract

In this paper, we extend to a general equilibrium context Bertrand's classic critique of Cournot. We present a game-theoretic model of a pure exchange, monetary economy, in which buyers as well as sellers announce both quantities and prices. When buyers act strategically, the "Edgeworth nonexistence problem" is circumvented: under weak conditions, a pure strategy Nash equilibrium exists for this game. We make precise the Bertrand idea that when agents in a finite economy are permitted to compete-by-price the resulting allocations will be competitive. Specifically, the Nash equilibria for our game yield allocations that are "competitive" allocations for the underlying exchange economy, provided that there are at least two buyers and two sellers actively trading in every market. Under this characterization of strategic behaviour, then, "two is enough for competition."

Suggested Citation

  • Leo K. Simon, 1984. "Bertrand, the Cournot Paradigm and the Theory of Perfect Competition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(2), pages 209-230.
    • Handle: RePEc:oup:restud:v:51:y:1984:i:2:p:209-230.
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    File URL: http://hdl.handle.net/10.2307/2297688
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    Cited by:

    1. Chowdhury, Prabal Roy, 1999. "Bertrand-Edgeworth equilibria with unobservable output, uncoordinated consumers and large number of firms," Economics Letters, Elsevier, vol. 63(2), pages 207-211, May.
    2. Dolgopolov, Arthur & Houser, Daniel & Martinelli, Cesar & Stratmann, Thomas, 2024. "Assignment markets: Theory and experiments," European Economic Review, Elsevier, vol. 165(C).
    3. Germano, Fabrizio, 2003. "Bertrand-edgeworth equilibria in finite exchange economies," Journal of Mathematical Economics, Elsevier, vol. 39(5-6), pages 677-692, July.
    4. Mouhua Liao, 2019. "A Multi-Stage Market Game that Implements any Walrasian Allocation in any Pure-Exchange Environment," Working Papers 2019-07-03, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University.
    5. Brian Albrecht & Omar Al-Ubaydli & Peter Boettke, 2022. "Testing the Hayek hypothesis: Recent theoretical and experimental evidence," Artefactual Field Experiments 00759, The Field Experiments Website.
    6. Goodhue, Rachael E. & Rausser, Gordon C. & Scotchmer, Suzanne & Simon, Leo K., 2002. "Biotechnology, intellectual property and value differentiation in agriculture," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt9w85z5r6, Department of Agricultural & Resource Economics, UC Berkeley.
    7. Liao, Mouhua, 2016. "A market game with symmetric limit orders," Journal of Mathematical Economics, Elsevier, vol. 64(C), pages 66-76.
    8. Goodhue, Rachael E & Rausser, Gordon C. & Scotchmer, Suzanne & Simon, Leo K., 2002. "Biotechnology, Intellectual Property and Value Differentiation in Agriculture," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt83h3x830, Department of Agricultural & Resource Economics, UC Berkeley.
    9. Goodhue, Rachael E. & Rausser, Gordon C. & Scotchmer, Suzanne & Simon, Leo K., 2002. "Biotechnology, intellectual property and value differentiation in agriculture," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt9w85z5r6, Department of Agricultural & Resource Economics, UC Berkeley.
    10. Prabal Roy Chowdhury, 2004. "Bertrand-Edgeworth equilibrium: Manipulable residual demand," Discussion Papers 04-15, Indian Statistical Institute, Delhi.
    11. Prabal Roy Chowdhury, 2004. "Bertrand-Edgeworth equilibrium with a large number of firms," Discussion Papers 04-12, Indian Statistical Institute, Delhi.
    12. César Martinelli & Jianxin Wang & Weiwei Zheng, 2023. "Competition with indivisibilities and few traders," Experimental Economics, Springer;Economic Science Association, vol. 26(1), pages 78-106, March.
    13. Arthur Dolgopolov & Cesar Martinelli, 2021. "Learning and Acyclicity in the Market Game," Working Papers 1084, George Mason University, Interdisciplinary Center for Economic Science.

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