A puzzle about economic explanation: examining the Cournot and Bertrand models of duopoly competition

Abstract

Economists use various models to explain why it is that firms are capable of pricing above marginal cost. In this paper, we will examine two of them: the Cournot and Bertrand duopoly models. Economists generally accept both models as good explanations of the phenomenon, but the two models contradict each other in various important ways. The puzzle is that two inconsistent explanations are both regarded as good explanations for the same phenomenon. This becomes especially worrisome when the two models are offering divergent policy recommendations. This report presents that puzzle by laying out how the two models contradict each other in a myriad of ways and then offers five possible solutions to that puzzle from various economists, philosophers of science, and philosophers of economics.