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Proceedings oI International ConIerence on Computing Sciences

WILKES100 ICCS 2013


ISBN: 978-93-5107-172-3
Review oI linear and non linear diIIerentiated duopoly model
Bhupinder Kaur
1
, Amanpreet Singh
2
and Harbir Singh
3

1
Research scholar of Desh Bhagat University, Mandi Gobindgarh (Punjab) (India)
2
Department of Applied Sciences, Institute of Engineering & Technology, Ropar (Punjab) India
3
Department of Mechanical Engineering , Rayat Bahra Institute of Engg. & Technology Hoshiarpur (Punjab) India
Abstract
Cournot Oligopoly are the most Irequently discussed models in the literature oI mathematical economics. Based on the
pioneering work many researchers have examined the properties with product diIIerentiation, multi-product models, labor-
managed Iirms, rent-seeking games to mention only a Iew have introduced and investigated with in the cournot Iramework
This review paper deals with the duality oI price and quantities in a diIIerentiated duopoly oI the diIIerent variants
and extensions oI the classical Cournot`s model.
2013 Elsevier Science. All rights reserved.
Keywords: Oligopoly, Duopoly , Equilibrium
1. Introduction
Two classical models in the theory oI oligopoly are those oI Cournot`s |3| and Bertrand . In both models the
equilibrium concept is the non cooperative equilibrium oI Nash. In the Cournot Iirms set quantities. In the latter
prices are the strategy variables. In a duopoly situation where Iirms produce a homogeneous good and marginal
costs are constant and equal Ior both Iirms, the Bertrand price equals marginal cost and the Cournot price is
above it. With diIIerentiated products, Bertrand prices are above marginal cost. In this case Cournot competition
is still viewed as more "monopolistic" than Bertrand competition.
We consider Iirst a diIIerentiated duopoly proposed by Dixit |4|. The demand structure is linear and allows the
goods to be substitutes or complements. Firms have constant marginal costs and there are no Iixed costs and no
capacity limits. In this setup Cournot and Bertrand equilibria are unique.
Suppose now that each Iirm can make only two types oI binding contracts with consumers: the price contract
and the quantity contract. II a Iirm chooses the price contract, this means that it will have to supply the amount
the consumers demand at a predetermined price, whatever action the competitor takes. II a Iirm chooses the
quantity contract, it is committed to supply a predetermined quantity independently oI the action oI the
competitor. Consider a two-stage game where Iirms Iirst simultaneously commit themselves to a type oI contract
and aIterwards compete contingent on the chosen types oI contracts. Restricting attention to sub game perIect
equilibria oI this game, They show that iI the goods are substitutes (complements), it is a dominant strategy Ior
Iirm / to choose the quantity (price) contract.
When the goods are substitutes, iI Iirms may commit themselves to oIIer consumers only a certain type oI
contract, they will always choose the quantity contract, and this will keep the prices high. When the goods are
complements, Iirms want to keep the quantities produced high to reinIorce each other's market, and they will
oIIer the price contract. This result generalizes, under certain assumption, to a nonlinear demand structure.
Furthermore, in the linear case the dominant strategy equilibrium turns out to be Pareto superior Irom the point oI
view oI the Iirms, since Cournot (Bertrand) proIits are the highest oI all when the goods are substitutes
(complements). To get the results, we take advantage oI the duality structure oI Cournot and Bertrand
competition in our diIIerentiated commodity setting. This duality was Iirst pointed out by Sonnenschein (1968) in
a non diIIerentiated Iramework. In Section 2 we present the linear model. Section 3 deals with non linear
diIIerentiated model. Section 4 extends the results to a nonlinear demand structure. Concluding remarks Iollow.
479 Elsevier Publications, 2013
*
Corresponding author. Bhupinder Kaur
Bhupinder Kaur, Amanpreet Singh and Harbir Singh
2. The linear model
We have an economy with a monopolistic sector with two Iirms, each one producing a diIIerentiated good, and
a competitive numeraire sector. There is a continuum oI consumers oI the same type with a utility Iunction
separable and linear in the numeraire good. ThereIore, there are no income eIIects on the monopolistic sector,
and we can perIorm partial equilibrium analysis. The representative consumer maximizes

2
1
2 1
) , (
i
i i i
q where q p q q U is the amount oI good i and
i
p , its price. U is assumed to be
quadratic and strictly concave
( ) 2 / 2 ) , (
2
2 1 2 1
2
1 1 2 2 1 1 2 1
q q q q q q q q U + + + =
where
i i
and are positive, i 1, 2, ,
, 0
2
2 1
> and o
j j i
> Ior . 2 , 1 , = i j i
i = 1,2. This utility Iunction gives rise to a linear demand structure. Inverse demands
are given by
2 2 1 2 2
2 1 1 1 1
q q p
q q p


=
=
in the region oI quantity space where prices are positive.
Letting ,
2
2 1
=

= = = = c and for b a
j
i j j i i
2 , 1 1 , / ) (
(note that
i
a and
j
b are positive because oI our assumptions), we can write direct demands as
2 2 1 2 2
2 1 1 1 1
p b p c a q
cp p b a q
+ =
+ =
provided that quantities are positive. The goods are substitutes, independent, or complements according to
whether 0

. Demand Ior good i is always downward sloping in its own price and increases (decreases) with
increases in the price oI the competitor iI the goods are substitutes (complements).
When ,
2 1 2 1
= = = and the goods are perIect substitutes.
When ,
2 1
2
2 1

and = expresses the degree oI product diIIerentiation, ranging Irom zero when the
goods are independent to one when the goods are perIect substitutes. When is positive and
2 1
2

approaches one, we are close to a homogeneous market.


3. Differentiated Non linear Duopoly Model
There are so many Companies and goods in a market But we will discuss Duopoly Model Let two companies A
and B and two goods X and Y in a market and each company sells its goods at a diIIerent price and Iacing a
diIIerent demand curve.
II we deIine diIIerent demand Iunction by
480 Elsevier Publications, 2013
Review of Linear and Non Linear Differentiated Duopoly Model
1 1 1
1
1
c Y b X a
D
+ +
=
2 2 2
2
1
c Y a X b
D
+ +
=
Where
i
a
and ve real numbers and
i
b
and
i
c
are any real no`s.
here
i
c
deIine the maximum price.
i
i
c
M
1
= When zero productions take place
Solving these equations Ior X and Y we get two non-linear equations
1 1 1
1
1
c Y b X a
D
+ +
=
2 2 2
2
1
c Y a X b
D
+ +
=

1 1 1
1
1
c Y b X a
D
+ + =

2 2 2
2
1
c Y a X b
D
+ + =
1
1
1 1
1
c
D
Y b X a = +
2
2
2 2
1
c
D
Y a X b = +
By applying non linear homogenous equations results we get

2
2
1
1
2 2
1 1
1
1
c
D
c
D
Y
X
a b
b a

2 2
1 1
2
2
1
1
1
1
a b
b a
A where
c
D
c
D
Y
X
A
481 Elsevier Publications, 2013
Bhupinder Kaur, Amanpreet Singh and Harbir Singh


2
2
1
1
2 2
1 1
2 1 2 1
2
2
1
1
1
1
1
1
1
1
c
D
c
D
a b
b a
b b a a
c
D
c
D
A
Y
X
This is called Direct demand Iunction
When
1
0
i
i
c
D
> and
i i
M D > should hold due to the speciIications oI Inverse demand Iunctions.
II we take
i i
i
i
i
i
i
D c
D
p
a
b

= =
1

From (2) we get

2
2
1
1
2 2
1 1
2 1
2 1
2 1
1
1
) 1 (
1
c
D
c
D
a b
b a
a a
b b
a a
Y
X

2
2
1
1
2 1
2
2
1
1
2 1
1
1
1
1
) 1 (
1
c
D
c
D
a a
a a
Y
X

2
1
2 1
2
2
1
1
2 1
1
1
1
1
1
1
p
p
a a
a a
Y
X


Further, Introducing a new variable
i
q deIined as

=
=
i
i
i
i
i
i
i i
i
i i
i i i
D
c
D
c
a
q or
D c
D
a q
p a q
1
)
1
(

=
i i
i
i
i
i
D M
D
c
a
q
482 Elsevier Publications, 2013
Review of Linear and Non Linear Differentiated Duopoly Model
This transIorms the direct demand Iunctions into

2
1
2 1
2
2
1
1
2 1
1
1
1
1
1
1
p
p
a a
a a
Y
X

2 2 1 1
2
2 2
1
1 1
2 1
1
1
1
1
p a p a
p a p a
Y
X

2 1
2
2
1
1
2 1
1
1
1
1
q q
q q
Y
X

=
2
1
1 2 1
1
1
1
q q
X

=
1
2
2 2 1
1
1
1
q q
Y


. . . (1)
Assumption When 1 0 < <
i

Solving (1) Ior


1
q and
2
q
then the inverse demand Iunctions with new variables
Y X
q
1
1
1
+
= and
Y X
q
+
=
2
2
1

. . .(2)
When
i

indicates a degree oI diIIerentiation oI good i to the other good two are perIect substitute 1
i
= and
one company monopolizes a market Ior 0
i
= iI we consider assumption1 it

is reasonable because the case
with diIIerentiated goods can be considered to be intermediate between the two extreme cases, the correct
substitute case with 1
i
= and monopoly case with 0
i
=
3.1 Cournot Competition
Cournot Equilibrium
Suppose n companies produces diIIerentiated goods g
n
with contact marginal cost m
n
and sells it with price p
n

It determines output so as to maximize its proIit
n n
n n n
n
n
g m
g g
g

+
=
3

For 2 , 1 = n
II we solve these Iirst order linear equations then the implicit Iorms are given by
483 Elsevier Publications, 2013
Bhupinder Kaur, Amanpreet Singh and Harbir Singh
( )
2
3 3 n n n n n n
g g m g

+ = . . . (3)
II we solve these implicit expression then we get reaction curves.
Intersection oI these reaction curves then determines Cournot outputs.
Put 2 , 1 = n
( )
2
2 1 1 1 2 1
g g m g + =
( )
2
1 2 2 2 1 2
g g m g + =
Dividing these equations we get
( )
( )
2
1 2 2
2 1 1
2
1
1 2
2 1

+
+
=
g g
g g
m
m
g
g

. . . (4)
Put
1
2
1
2
,
m
m
m
g
g
g = = in equation (4)
We get
2
2
1
2
1
2
1
2
1
1
1

+
=

g
g
g
g
m
g
( )
( )
2
2
1
2
1
1 1

+
+
=

g
g
m
g
( )
( )
2
2
1
2
1
1

+
+
=

g
g
g m
( )
2
1 2 1
2
2
) 1 ( g g g m + = +
( ) ) 2 1 ( 2
1
2 2
1 2 1 2
2
2
2
g g g g g m + + = + +
( ) 0 ) 2 ( 2
2 2 1
2
2 1
2 2
1 2 2 1
3
1
= + + + g m g m g m
Thus is a cubic equation in g we can solve But it is better to solve this equations by the intersection oI quadratic
polynomial and straight line so we get an existence oI a ratio oI Cournot outputs.
Now iI we take Irom above equation
484 Elsevier Publications, 2013
Review of Linear and Non Linear Differentiated Duopoly Model
g m g F
m
1
1
) (

= and
( )
( )
2
2
1
1
) (

+
+
=

g
g
g G
Clearly 1 ) ( , 0
1
) 0 (
2
1
2
2
< = >

g G Limit G
g
and
( )
( )
m
g
g
g G >

+
+
= 0
1
) (
2
2
1

with a positive Intercepts on the vertical axis


4
2
2
2
1 1 1
2
2
) (
) ( 2 ) 1 ( ) 1 ( 2 ) (
) (
g
g g g g
g G
+
+ + + +
=


4
2
1 2 1 1 2
) (
)| 1 ( ) ( )|( 1 ( 2 ) (
) (
g
g g g g
g G
+
+ + + +
=


3
2
1 2 1 1 1
) (
| 1 )|( 1 ( 2
) (
g
g g g
g G
+
+ +
=


0 ) 1 ( 0
) (
| 1 )|( 1 ( 2
) (
2 1
3
2
2 1 1
< <
+
+
=


as
g
g
g G
0 ) 1 ( 0
) (
| 2 3 )| 1 ( 2
) (
2 1
4
2
1 2 1 2 1
> >
+
+
=


as
g
g
g G
Hence G(g) is positive Ior all g with a positive intercept on the vertical axis , bounded Iorm below , strictly
decreasing and strictly convex in g

and ) (g F
m
is linear and strictly increasing Iunction Also 0 ) 0 ( =
m
F
Two curves Intersection exactly once under assumption 1
Let us denote the solution that is a ratio oI Cournot outputs produced by the two companies.
Since it is a Iunction oI parameters m and
1
or
2
( )
( )
2
2
1
2
1
1

+
+
=

m
( )
( )
2
2
1
1
2
1 1

+
+
=

m
II we solve it we get in terms m
2 1
,
The value oI depending on the value m it can be any positive numbers and strictly decreasing in m and it
converges to inIinity as m lends to zero and tends to zero as m tends to inIinity.
put
c
c
g
g
1
2
=
c c
g g
1 2
= Substitute in (4)
485 Elsevier Publications, 2013
Bhupinder Kaur, Amanpreet Singh and Harbir Singh
We get Cournot outputs in terms oI c,
1
,
2

1 2
1 2 2
1 1 2 2
(1 ) ( )
c
g
m m


= =
+ +
1 2
2 1 2
1 1 2 2
( ) ( )
c
g
m m

= =
+ +

These values are represented the Cournot outputs which Iurther use in continuous dynamics with out time delay
and with time delays. To maximize proIit Bertrand also use this equation Ior equilibrium
4. Conclusion
Cournot competition with substitutes is the dual oI Bertrand competition with complements. exchanging price
and quantities we go Irom one to the other . II the Iirms can be pre-commit to quantity or price contract and the
goods are substitutes it is a dominant strategy Ior a Iirm to choose the quantity contact. Furthermore, in the linear
case the dominant strategy equilibrium is also Pareto superior in terms oI proIits.
References
|1| Chiarella, C. and F. Szidarovszky (2002) .The Birth oI Limit Cycles in Nonlinear
Oligopolies with Continuously Distributed InIormation Lags." In: ModelinUncertainty (M. Dror, P.L'Ecuyer and
F.Szidarovszky,eds.) Kluwer Academic Publishers, Boston London.
|2| Chiarella, C. and F. Szidarovszky (2009) 'Existence and Uniqueness in Cournot models with cost ex-ternalities Mathematica
Pannonica 20/9,1-9
|3| Cournot, A. (1838), Recherches sur les Principles Mathematiques de la Theorie de Richessess. Hachette, Paris. (English
translation (1960):Researches into the Mathematical Principles oI the Theory oI Wealth, Kelley, New York).
|4| Dixit,A.K. A model oI duopoly suggestiong a theory oI entry barriers. Bell Journal oI Economics 10 (1979), 20-32
|5| |Guckenheimer, J. and P. Holmes (1983) Nonlinear Oscillations, Dy namical Systems and Bifurcations in Vector Fields. Springer-
Verlag, Berlin Heidelberg New York.
|6| Matsumoto, A. and T. Onozaki (2006) Heterogeneous Strategies in Nonlinear Duopoly with Product DiIIerentiation." Pure Math.
and Appl. (Iorthcoming)
|7| Okuguchi, K. (1976), Expectations and Stability in Oligopoly Models. Springer- Verlag, Berlin Heidelberg/New York.
[8] Okuguchi, K. and F. Szidarovszky (1999), The Theory of Oligopoly with
Multi-product Firms. 2nd ed., Springer-Verlag, Berlin Heidelberg New York.
|9| Puu, T. (2003) Attractors, Bifurcations, and Chaos. 2nd ed ., Springer- Verlag, Berlin Heidelberg New York.
|10| Puu, T. and I. Sushko (eds.) (2002) Oligopoly Dynamics. Springer- Verlag, Berlin Heidelberg New York.
|11| Singh.N and V.Xavier(1984) Price and quantity competition in a differentiated
a. duopoly .Rand Journal oI Economics Vol.15.,No 4
486 Elsevier Publications, 2013
Index

D
Duopoly game, model, 475476

E
Equilibrium point, 476477

L
Local stability, 476
Nash-equilibrium, 477
of boundary equilibrium, 477

N
Nave expectations
model for, 474475
Nash-equilibrium, 477

O
Oligopoly market, 473