The Basics
- Simple definition: An oligopoly model where firms compete by setting prices simultaneously, and consumers buy from the cheapest.
- Core idea: Price competition can be fierce – firms undercut each other until price equals marginal cost.
- Think of it as: Price wars – each tries to offer a slightly lower price than rivals.
What It Actually Means
Joseph Bertrand criticized Cournot, arguing that firms compete on price, not quantity. With identical products, each firm can capture the entire market by slightly undercutting rivals. This triggers undercutting until price = marginal cost, the same as perfect competition, even with only two firms. This “Bertrand paradox” – duopoly can be perfectly competitive – depends on product homogeneity and no capacity constraints. With differentiated products, prices stay above cost.
Example
Two petrol stations on the same intersection sell identical fuel. If one charges Rs. 250/liter, the other can charge Rs. 249 and get all customers. First, then cuts to Rs. 248 – continues until price just covers cost.
Why It Matters
Bertrand shows that price competition can be extremely intense. It explains why firms differentiate products to soften competition. Used in antitrust analysis of price-fixing.
Don’t Confuse With
Cournot Model – Cournot is quantity competition; Bertrand is price competition. Outcomes differ dramatically.
See also
Oligopoly • Cournot Model • Price Competition • Product Differentiation • Edgeworth Paradox
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