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The Cournot-Bertrand profit differential: A Reversal result in network goods duopoly

Rupayan Pal

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: We revisit the classic profit-ranking of Cournot and Bertrand equilibria and the issue of endogenous choice of a price or a quantity contract, but for a network goods duopoly. We show that, if network externalities are strong (weak), each firm earns higher (lower) profit under Bertrand competition than under Cournot competition. Therefore, unless network externalities are weak, the classic profit-ranking is reversed. When modes of product market competition are endogenously determined, Cournot equilibrium always constitutes the subgame perfect Nash equilibrium (SPNE). However, a prisoners's dilemma type of situation arises and the SPNE is Pareto inefficient, unless network externalities are weak.

Keywords: Network externalities; Cournot; Bertrand; Profit ranking; Endogenous mode of competition (search for similar items in EconPapers)
JEL-codes: D43 L13 (search for similar items in EconPapers)
Pages: 17 pages
New Economics Papers: this item is included in nep-bec, nep-com, nep-ind and nep-net
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Persistent link: https://EconPapers.repec.org/RePEc:ind:igiwpp:2013-014

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