As a solution to the
Bertrand paradox in economics, it has been suggested that each firm produces a somewhat differentiated product, and consequently faces a demand curve that is downward-sloping for all levels of the firm's price.
An increase in a competitor's price is represented as an increase (for example, an upward shift) of the firm's demand curve.
As a result, when a competitor raises price, generally a firm can also raise its own price and increase its profits.
Calculating the differentiated Bertrand model
*q
1 = firm 1's demand, *q
1≥0
*q
2 = firm 2's demand, *q
1≥0
*A
1 = Constant in equation for firm 1's demand
*A
2 = Constant in equation for firm 2's demand
*a
1 = slope coefficient for firm 1's price
*a
2 = slope coefficient for firm 2's price
*p
1 = firm 1's price level pr unit
*p
2 = firm 2's price level pr unit
*b
1 = slope coefficient for how much firm 2's price affects firm 1's demand
*b
2 = slope coefficient for how much firm 1's price affects firm 2's demand
*q
1=A
1-a
1*p
1+b
1*p
2
*q
2=A
2-a
2*p
2+b
2*p
1
The above figure presents the best response functions of the firms, which are complements to each other.
Uses
Merger simulation models
A model is an informative representation of an object, person, or system. The term originally denoted the plans of a building in late 16th-century English, and derived via French and Italian ultimately from Latin , .
Models can be divided int ...
ordinarily assume differentiated Bertrand competition within a market that includes the merging firms.
See also
*
Bertrand competition
Bertrand competition is a model of competition used in economics, named after Joseph Louis François Bertrand (1822–1900). It describes interactions among firms (sellers) that set prices and their customers (buyers) that choose quantities at the ...
*
Bertrand paradox (economics)
In economics and commerce, the Bertrand paradox — named after its creator, Joseph Bertrand — describes a situation in which two players (firms) reach a state of Nash equilibrium where both firms charge a price equal to marginal cost ("MC"). Th ...
*
Oligopoly theory
References
External links
Oligoply Theory made Simple Chapter 6 o
by
Huw Dixon
Huw David Dixon (/hju: devəd dɪksən/; born 1958) is a British economist. He has been a professor at Cardiff Business School since 2006, having previously been Head of Economics at the University of York (2003–2006) after being a professor ...
.
Competition (economics)
Oligopoly
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