7c. Bertrand

Question 1

What is specific about the “Bertrand” oligopoly?

Answer 1

Instead of setting QUANTITIES, firms set PRICES

Question 2

Bertrand equilibrium is a set of ________________________

Answer 2

Bertrand equilibrium is a set of prices that are mutual best responses.

-> in other words: no firm can obtain a higher profit by choosing a different price given the price set by the competitor.

Question 3

What are some of the assumptions of the “Bertrand” model?

Answer 3

Assumptions of the model:
- firms have identical costs
- firms produce identical goods

Question 4

Consider a duopoly, and firm 1 undercuts the price of their rivals, what happens?

Answer 4

If firm 1 undercuts its rivals price, firm 1 would capture the entire market and earn all profit
-> thus firm 2 also has an incentive to cut firm 1’s price

Question 5

What does the “Bertrand Equilibrium” price equal?

Answer 5

Bertrand equilibrium price equals marginal cost because of incentives to undercut

Question 6

However, what happens with the “Bertrand Model” in the case of differentiated products?

Answer 6

Many economists believe that price-setting models are more plausible than quantity-setting models when goods are differentiated
-> One firm can charge a higher price for its differentiated product without losing all sales.. eg. Coke and Pepsi

Question 7

If we relax the identical goods assumption, the Bertrand model predicts that firms set prices _________ MC

Answer 7

If we relax the identical goods assumption, the Bertrand model predicts that firms set prices above MC

Question 8

In all of Cournot, Stackelberg and differentiated Bertrand the MR is ________ than the MC !

Answer 8

MR > MC, so there IS a DWL…
- The monopoly quantity is the lowest, so the DWL here is the largest
- The cournot duopoly has a lower quantity produced than stackelberg, so cournot DWL is greater than stackelberg