Bertrand Competition
Bertrand competition is a market model where firms compete by setting prices for homogeneous goods. Named after economist Joseph Bertrand, this model assumes that firms choose prices rather than quantities, leading to a situation where prices are driven down to marginal cost. This can result in a "Bertrand paradox" where prices are driven to the lowest possible level.
3 Key excerpts on "Bertrand Competition"
eBook - ePubMarkets for Managers
A Managerial Economics Primer
- Anthony J. Evans(Author)
- 2014(Publication Date)
- Wiley(Publisher)
...It's boring as well, because neither have scope for strategy. In the case of perfect competition firms are simply choosing a level of output in response to the given market price (over which they have no influence). In a monopoly the firm is making a pricing decision immune from the threat of competition. The concept of ‘oligopoly’ is an attempt to make things more realistic, by introducing a degree of market power. It can be defined as a small number of sellers dominating the vast majority of a market. In contrast to perfect competition or monopoly, oligopolies give rise to strategic interaction, because your competitors' decisions will have a direct impact on what happens to you. There are three forms of oligopoly model that are interesting to understand: Cournot competition This is where firms simultaneously choose a level of output. They would both like to split the market in two (i.e. act as a shared monopoly) but this isn't a stable outcome since both firms have an incentive to produce slightly more than the other in order to boost their own profit. Stackelberg competition Where firms can make a sequential choice and first mover advantage means that whichever firm moves first can enjoy higher profits. Bertrand Competition Where firms simultaneously choose a level of price. Similar to Cournot competition, they would like to charge high prices and act like monopolists. But they both have an incentive to undercut the other and capture the entire market. At the extreme Bertrand Competition demonstrates how you can end up with the perfectly competitive outcome (i.e. P=MC) with just two (non-collusive) firms competing. You can think of Unilever and Procter & Gamble as an example of two firms that dominate a market (in this case consumer goods) and yet still compete such that prices are close to marginal cost. Indeed in some situations you don't even need a second firm, simply the threat of entry is sufficient to ensure the monopolist doesn't abuse their position...
eBook - ePubIntermediate Microeconomics
A Tool-Building Approach
- Samiran Banerjee(Author)
- 2014(Publication Date)
- Routledge(Publisher)
...The canonical models are those of Joseph Bertrand and Harold Hotelling. 13.2.1 Bertrand duopoly Firm 1 and firm 2 sell DVDs online at prices p 1 and p 2. Assume that the shipping services are comparable and so shoppers regard one firm’s product as identical to the other’s. Suppose the inverse market demand is p = 200 − Q, where Q = q 1 + q 2. Because shoppers can do price comparisons easily using shopbots, if p 1 < p 2, then everyone purchases from firm 1, i.e., q 1 = 200 − p 1 and q 2 = 0. Conversely, if p 2 < p 1, then everyone purchases from firm 2, i.e., q 2 = 200 − p 2 and q 1 = 0. If p 1 = p 2 = p ̄, then the firms split the buyers equally, i.e., q 1 = q 2 = (200 − p ̄)/2. Assume that each firm can acquire the DVD from the manufacturer at a constant marginal cost of $10 per DVD. What is a NE in prices, (,)? For instance, could (15, 15) be a NE? In this case, firm 1 could reduce its price to $14.99 and be the sole seller of the DVD and drive firm 2 out of the market. Likewise, firm 2 could further undercut firm 1’s price by a cent to $14.98, kicking firm 1 out. Successive rounds of such undercutting behavior imply that only (,) is a NE, i.e., each firm chooses to set its price equal to marginal cost in equilibrium. This result is known as the Bertrand paradox : how is it that marginal-cost pricing requires the presence of many, many firms under perfect competition while under price competition it only requires two firms? The paradox can be resolved by examining two underlying assumptions in Bertrand’s model: (i) each firm sells an identical homogeneous product, and (ii) each firm can handle the entire market demand when it undercuts its rival. If firms sell differentiated products — similar, but not identical products— then because of branding or consumer loyalty, one firm could charge above its marginal cost and not be fearful that its entire clientele could be captured by the other firm undercutting its price...
eBook - ePubExperimental Economics
Volume II: Economic Applications
- Pablo Branas-Garza, Antonio Cabrales, Pablo Branas-Garza, Antonio Cabrales(Authors)
- 2016(Publication Date)
- Palgrave Macmillan(Publisher)
...Although this is true on average, there is also certain variability around these predictions. These persistent oscillations decrease the predictive power of the equilibrium. In addition, in repeated-game scenarios, the total quantity is frequently not significantly different from the collusive prediction. In some cases, the total quantity oscillates between the collusive quantity and that of Cournot. In summary, although moderately positive results regarding the predictive power of Cournot equilibria have been found, it seems that there are fundamental differences in the patterns of the data obtained in the experiments based on Cournot models (strategic quantity-setting) and the ones based on Bertrand models (strategic price-setting). Huck et al. (2000) and Altavilla et al. (2006) both study markets of price and quantity-setting in a framework of differentiated products, where the Bertrand equilibrium is quite close to the Cournot equilibrium. Even though such experiments generally provide evidence that supports the Nash equilibrium predictions for the two types of markets (price-setting and choice of quantity), these works show that information derived from past strategies and results plays a crucial role. Collusion in Cournot markets, vs. Bertrand markets, deserves thorough discussion. Suetens and Potters (2007) show that behavioral outcomes in Cournot markets tend to be more competitive relative to equilibrium as compared to those in Bertrand markets. Hence, more collusive behavior is detected on average in price-setting than in quantity-setting oligopolistic markets, with prices in price-setting experiments being above equilibrium prices, and quantities in quantity-setting experiments being above equilibrium quantities (see also Holt 1995, and Engel 2007). Moreover, the scope for tacit collusion in both types of markets is strongly affected by the number of competitors...
