Bertrand model

Question 1

assumptions

Answer 1

two firms
each firm chooses its price
price choice made simultaneously
both firms sell positive quantities
homogenous good
face the same inverse demand curve

Question 2

consequence of both selling positive quanitites

Answer 2

Prices must be equal since otherwise consumers would just buy from where it is cheaper, and the other supplier will sell 0 quantity.

Question 3

price and marginal cost at equilibrium.

Answer 3

P cannot be less than MC at equilibrium since this would imply cutting quantity can increase profits (less costs and revenue however change to costs>revenue). Same can be said for P > MC… cannot be since contradiction. Therefore at equilibrium P = MC for both firms.

Question 4

equilibrium

Answer 4

No incentive to unilaterally change what they are doing (both firms).

Question 5

market power

Answer 5

Neither firm has any market power at equilibrium since they bith produce where p = mc.

Question 6

Bertrand equilibrium

Answer 6

Always yields marginal cost pricing. Neither firm has any market power. Seems paradoxical since only 2 firms. Only 2 firms needed for competitive outcome

Question 7

Solving paradox

Answer 7

product differentiation, non linear pricing, tacit collusion