In the world of economics, the Edgeworth model is built on the Cournot model. His model examines price and quantity competition between two small firms. So simply every assumption of the Cournot and Bertrand model is also related.
According to Edgeworth’s model, prices and production quantities will continue to fluctuate as a result of price competition, and balance amounts will not result in equilibrium prices either.
Like Betrand, the Edgeworth Model determines the production level that maximizes each other’s profits, while the other duopolist is assumed not to change the current price level. What distinguishes this model from the Bertrand model is that each model has the capacity to meet some but not all of the market demands. Unlike the Cournot and Bertrand models, the Edgeworth model does not have a specific solution. In the Edgeworth model, the price level constantly fluctuates between the monopoly price and the minimum price contained within the capacity constraints.
Here are some of the assumptions of the Edgeworth model
– Each firm assumes that other firms will not change the price level when determining the profit-maximizing level of production
– Companies compete for price.
– Each company has the production capacity to meet a number of market demands.
– The company does not have the capacity to meet all the demands in the market.
– The Company’s goals are mutually destructive. This creates a state of instability in the market.
– Production costs are zero. The resulting goods are homogeneous.
– There is no stable equilibrium in the model as a result of price competition with firms. Due to the reciprocal reaction of companies, production levels and prices continue to fluctuate.
What is the Bertrand Model?
This model is a state of the market in which there is a price competition of two firms. This model was developed in 1883. When one company lowered its price, the others reacted as well by lowering the price.
Price competition continues to balance P=MC. The Bertrand model is a duopole in this sense, but when it strikes a balance it resembles a fully competitive market.
The assumptions of this model include:
– Each firm assumes that other firms will not change the price level when determining the profit-maximizing price level.
– In the model, firms compete for price.
– Each company has the production capacity to meet all market demands.
– In the model, the firm’s price competition continues until the condition P = MC is provided in the equilibrium of the model;
– The production rate and price are the same as the full competitive production and price level.
– Firms are balanced at the point where the demand curve intersects the quantity axis.
– The price on the model is lower than the Cournot balance price.
– Companies enter the market simultaneously at the same time.
– There is an assumption of full knowledge.
– The cost is zero.
Edgeworth Model is one of the pricing models applied in the Oligopoly market. In this model, it is applied to assess the condition of homogeneous products where the company that produces it has an output limit (number of requests). The Edgeworth model itself is the opposite of the Bertrand model where in the Bertrand Model it is assumed that the company is able to meet all market demands or there is no output limit. From these 2 models, it was developed into a new model called the Bertrand Edgeworth Model.
Bertrand Edgeworth Model is a mixed strategy model of 2 models that are often applied in oligopoly markets, namely the Bertrand model and the Edgeworth model. This model was developed by Martin Shubik. The Bertrand Edgeworth Model combines the two assumptions so that in this model it is possible for the company to be able to meet demand only limited to the output that gives it maximum profit at a certain price limit.
The maximum profit in this model can be obtained if the marginal cost is equal to the product price. The equilibrium price in the Bertrand Edgeworth Model will be a perfectly competitive price where all firms in an oligopoly market charge the same price as marginal cost and the quantity demanded is equal to the quantity supplied. It’s just that equilibrium can only occur when there is competitive price competition or the law of infinitely elastic demand (horizontal line) applies.
In its development, Bertrand Edgeworth Model received many responses, both related to the characteristics of the model and the assumptions in it. There are several figures who say that the assumption of a price balance in the model is difficult to achieve, even though there is evidence regarding the balance that is formed, but still the balance is not easy to characterize. Perfectly competitive pricing only tends to occur in markets where many firms are involved. Further developments, many figures consider the Bertrand Edgeworth Model to be unreasonable so that to perfect the model, various alternative approaches must be applied.
Bertrand Edgeworth model is an assumption model to explain the description of the imperfect competition market concept Oligopoly where in this approach there are at least two companies that produce homogeneous products take decisions to determine and set the selling price at the same time with marginal costs or lower than marginal costs compared to having to determine the amount of the firm’s output.
The decision to choose a price compared to the company’s output is made with the consideration that consumers prefer products with cheap prices in the market and oppose the market law theory which states that prices are formed from the existence of a demand and supply mechanism between sellers and buyers or producers and consumers.
As the name implies, the Bertrand-Edgeworth oligopoly market concept was developed by a French economist named Joseph Louis Francois Bertrand, a French economist and an Anglo-Irish philosopher and political economist named Francis Ysidro Edgeworth. The Bertrand-Edgerworth Oligopoly Model is a combination of price-setting oligopoly theory (Bertrand Paradox) and Nash equilibrium theory of pure strategy (Edgeworth Paradox).
In the approach of Josep Louis francois Bertrand his model assumes that the company is willing and able to supply all requests and there is no limit to the number and capacity that the company will produce or sell. in a later development, Francis Ysidro Edgeworth considers a case where there is a limit to what a company can sell (a capacity limit) where he shows that there is a fixed limit to each product a company can sell.
