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Part III: Market Structures and the Decision-Making Environment The Bertrand duopoly model indicates that firm A maximizes profit by charging $64, and firm B maximizes profit by charging $56. Figure 11-4 illustrates the Bertrand duopoly model. Note that both the horizontal and vertical axes on the figure measure price and not quantity (as in the Cournot and Stackelberg models).
Figure 11-4: A Bertrand duopoly.
In the Bertrand model, firms compete with price. Therefore, reaction functions are expressed in terms of price, not quantities.
Leading the pack: Another view of price leadership The Stackelberg model of oligopoly illustrates one firm’s leadership in an oligopoly. In the Stackelberg model, the leader decides how much output to produce with other firms basing their decision on what the leader chooses. Another common form of leadership is for the leading firm to set price. Rival firms then use the same price for their products. However, as is always the case in oligopoly, the leading firm must take into account the behavior of its rivals. The leading firm that initially sets price is called the dominant firm. The firms that use the price set by the dominant firm are typically smaller in size and
