Bertrand Model

Question 1

What is it?

Answer 1

Simultaneous Price Setting

Question 2

Nash Test

Answer 2

Considering every feasible strategy, (a1, a2), and ask if either play can make a unilateral deviation and become better off.

If neither player can benefit from a unilateral deviation, then (a1, a2) must be a NE.

Question 3

Bertrand Model Assumptions

Answer 3

1. Identical/Homogenous Goods
2. Identical/ Constant Marginal costs.
3. No recurring fixed costs.

Question 4

How do firms set prices in the Bertrand Model?

Answer 4

Firms should avoid setting price below marginal cost. P is greater than or equal to marginal cost.

Best responding will mean setting price equal to or below the other firm.

If Pa < Pb, then Qb = 0, and firm A will face the full market demand, D(pi).

Question 5

What is the best response in the Bertrand Model?

Answer 5

(pi - c)D(pi)/2. This means the price for firms A and B are equal.

Prices are equal to marginal cost, and changing this behaviour would lead to firms being worse off.

Question 6

What market structure is the Bertrand Model most similar to?

Answer 6

Perfect competition, bc price = marginal cost. All profits get competed away, and any agreements are broken in order to undercut the rival firm and secure a greater market share.

Question 7

Bertrand Model Critiques

Answer 7

It assumes firms can produce any quantity, with no capacity constraints.

It assumes one-shot interaction, when in reality, most firms interact repeatedly.

It assumes identical products. If there are differentiated products, firms can charge higher than P > MC. FIRMS CAN INCREASE PRICE WITHOUT LOSING MARKET SHARE.