The Cournot (duopoly) model is based on a market where there are two firms, no other firms can enter and they sell identical or homogenous products. How much one firm produces directly affects the profits of the other firms, because market price depends on total output. Thus choosing its strategy to maximize its profit, each firm considers the output the other firm will produce. The cournot model focuses not on price, but on quantity. An example can be from the duopoly market of United Airlines and American Airlines . How many passengers does each airline choose to carry? Both firms have to know the output level that maximizes its profits, knowing how much their rivals produce. In Bertrand’s model however, the firms set prices rather than quantity and allow consumers to decide how much to buy. The market equilibrium in his model depends on whether firms are producing identical or differentiated products. When firms produce identical products, the equilibrium price will equal marginal cost (and average cost). However, it is more likely to find markets with differentiated goods, like cars, computers or perfume. In this case firms set prices above marginal cost, and prices rely on demand. An example can be the cola market. Cola and Pepsi produce similar but not identical goods. If the price of Pepsi would to fall slightly relative to that of coke, some consumers who prefer coke to Pepsi would not switch. Thus neither firm’s best response curve would lie along the 45degrees line through the origin (like when goods are identical). In conclusion, in this type of market environment, it is probably better to use the Cournot model because it seems more likely that when firms produce identical products, firms set quantities rather than prices.
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