BERTRAND VERSUS COURNOT REVISITED

Bertrand criticized Cournot's analysis of the competitive process, arg uing that firms should be seen as playing a strategy of setting price below competitors' prices (henceforth, the Bertrand strategy) instead of a strategy of accepting the price needed to sell an optimal quantit y (the Cournot strategy. We characterize Nash equilibria in a generali zed model in which firms choose among Cournot and Bertrand strategies. Best responses always exist in this model. For the duopoly case, we s how that iterated best responses converge under mild assumptions on in itial states either to Cournot equilibrium or to an equilibrium in whi ch only one firm plays the Bertrand strategy with price equal to margi nal cost and that firm has zero sales.