8 Oligopoly - Luiscabral.net

demanded, that is, output is perfectly adjusted to the quantity demanded at the prices
(initially) set by firms.
To summarize:
If capacity and output can be adjusted easily, then the Bertrand model describes
duopoly competition better. If output and capacity are difficult to adjust, then the
Cournot model describes duopoly competition better.
Most real-world industries seem closer to the case when capacity is difficult to adjust. In
other words, capacity or output decisions are normally the long-run variable, prices being
set in the short run. Examples include wheat, cement, steel, cars, computers. Consider,
for instance, the market for video-game consoles. On August 1999, Sony cut the price of
its system from $129 to $99. One hour after Sony’s price-change press release, Nintendo
published its own release announcing a price cut to match Sony’s. 9 Aggressive pricing by
Sony and Nintendo boosted demand for their products. In fact, Nintendo suffered severe
shortages during the 1999 holiday season. These events suggest that, in the context of
video-game systems, prices are easier to adjust than quantities. The Cournot model would
then seem a better approximation to the behavior of the industry.
There are, however, situations where capacities — or at least output levels — are adjusted
more rapidly than prices. Examples include software, insurance and banking. A
software company, for example, can easily produce additional copies of its software almost
on demand; sometimes, in fact, it will simply ship a copy electronically. In this sense, the
Bertrand model would provide a better approximation than the Cournot model. k
8.4. The models at work: comparative statics
What is the use of solving models and deriving equilibria? Models are simplified descriptions
of reality, a way of understanding a particular situation. Once we understand how a given
market works, we can use the model to predict how the market will change as a function
of changes in various exogenous conditions, e.g., the price of an input or of a substitute
product. This exercise is known in economics as comparative statics: the meaning of the
expression is that we compare two equilibria, with two sets of exogenous conditions, and
predict how a shift in one variable will influence the other variables. The word “statics”
implies that we are not predicting the dynamic path that takes us from one equilibrium to
the other, but rather answering the question “once all of the adjustments have taken place
and we are back in equilibrium, what will things look like.”
In this section, I look at some examples of how the Cournot and Bertrand models can
be used to perform comparative statics. Some of the practice and challenge exercises at the
end of the chapter, especially Exercise 8.17, take the idea of comparative statics a few steps
further.
Input costs and output price. Suppose the market for transatlantic flights between
London and New York is served by two firms, American Airlines (AA) and British Airways
k. There are, however, other aspects to be taken into account in an industry like software: product
differentiation (cf Chapter 15) and network effects (cf Chapter 18).