| When competition between firms is based on quantities (Cournot competition), the reaction functions we derive tell us that when Firm A increases its output, Firm B’s best response is to cut its own. However, when competition between firms is based on price (Bertrand competition), reaction functions tell us that Firm B’s response to a cut in Firm A’s price (which will lead to an increase in the quantity A sells) should be a corresponding cut in B’s price (and a corresponding increase in its own output). Reconcile these two results. |
