Compare and Contrast Essay on Models of Business Competition between Firms

2021-05-17 17:18:27
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Introduction

In the modern-day business world, a firm having a competitive edge over the opponent is the only sure way to rate success as an inevitable aspect. To make sure that they survive in a very diverse environment where no factor is regularly consumed due to a complicated competition scenario, many firms have improvised ways and adapted to models that favor their strategic maneuvers. According to a study by Cater and Pucko (2006), who analyzed a statistically viable number of firms in Slovenia, their findings indicated that many organizations attempting to maintain an active competitive edge usually consider the advantages conferred by the adapted model.

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Competition only exists for those firms producing homogeneous or related products. Taking that as the baseline of this discussion, three models of competition between companies discussed in this paper are, the Cournot competition model, the Bertrand competition model, and the Stackelberg model of competition.

Cournot Model of Competition

This particular model mainly involves firms that are producing homogenous products, that is, products that look similar in every simple detail. A good example is competition between dairy and fresh farm products such as fruits and vegetables. Within this model of competition, firms compete on the quantity of output that they can deliver. It is, however, important to note that the output volume decided upon by one of the players is a sole decision that does not depend on the competitor (Chapter 9, n.d).

Bertrand Competition Model

This particular model functions on the same competitor specifications as in the Cournot model, but the aspect of significance is that firms compete on the price rather than the output. In a competitive environment where firms are producing homogenous products, the Bertrand model advocates for the companies to compete on the price factor. Based on the underpinning economic principles of this particular model, firms producing homogeneous products stand a chance of outdoing each other if they compete on the price factor (Chapter 9, n.d).

Stackelberg Competition Model

This model takes the approach described by the game theory where there exists a market leader and followers. In the Stackelberg model, competitors are not on the same level concerning market share and financial capabilities, but the steps taken by each of them can seriously affect the other party. The Stackelberg model operates on the principle that firms compete on the quantity of output. In a scenario where the game theory principles are followed, the market leader has to commit to a particular move before the followers can make theirs (Massachusetts Institute of Technology, 2004).

Comparison of Business Competition Models

The Cournot and Stackelberg models operate on slightly the same principle where competing firms have to concentrate on the output. In the Cournot model, the playing ground is the same, meaning that any company that mass produces carries the day regarding profit maximization. In the Stackelberg model, preferably in a scenario where a firm has been acting as a monopoly but currently there is a late entrant, the profit maximization of the leader solely depends on the actions of the follower. If the follower delivers large output than the head, the profit margin of the leader is most likely to soar. In the Bertrand model which competitors use the pricing factor, the low price approach is most likely to ensure success. The low-price approach does not mean that a firm has to register losses but rather maximize profits through operating on slightly lesser prices that end up attracting more conscious customers.

References

Cater, T., & Pucko, D. (2006). Models of competition between firms: the case of Slovenia's (post) transitional economy. Journal for East European Management Studies, 140-172.

Chapter 9. (n.d). Quantity vs. Price Competition in Static Oligopoly Models. [Pdf File]

Massachusetts Institute of Technology. (2004). The Basics of Game Theory. [Pdf File]

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