Critically discuss the view that the Cournot, Bertrand and Stackelberg Essay

Critically discuss the view that the Cournot, Bertrand and Stackelberg models of oligopoly are fundamentally flawed and are unable to explain recent events in the markets and industries - Essay Example It is a common practice for firms in an oligopoly market to collude in setting up prices with an intention of mitigating the risks that arises in the particular market. However, most of the alliances formed are outlawed in most countries given that they short-change customers because of the less competition that they have unlike in other markets such a perfect competition environment (Vives, 1999). Models developed by three scholars try to explain the concept of an oligopoly market. The Cournot, Bertrand and Stacklerg models are used to explain the theory of oligopoly. The Game theory is widely applied by three models to analyse the market critically under consideration (GineviÄ ius and Krivka, 2008). In a Cournot oligopoly, business entities compete on the basis of production levels. They determine the volume of products they are supposed to produce separately within a specified period. The main assumption made in a Cournot oligopoly is that the core business activity of a business entity is profit maximization. It assumes that the decision of determining the volume level is independent. Furthermore, it is assumed that all players in the market are aware of the cost function and the number of players that exist in the market. However, the cost function may vary from one organization to another (Giocoli, 2003). Some of the implication of the assumptions made in Cournot model is that the production level in the market is likely to be less compared to that of other markets such as the perfect competition market (Kopel and Là ¶ffler, 2008). Additionally, the prices in a Cournot oligopoly are lower compared to those of other markets. Conversely, given the nature of the market, formation of firms are likely to form cartels. Consequently, the model can be transformed to become similar to that of a monopoly market (Day et al., 2002). Cournot models assume firms