bertrand-1 - Price Competition: Bertrand In the Cournot...

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ECO 171 Industrial Organization Price Competition: Bertrand In the Cournot model price is set by some market clearing mechanism Firms seem relatively passive An alternative approach is to assume that firms compete in prices: this is the approach taken by Bertrand Leads to dramatically different results Take a simple example two firms producing an identical product (spring water?) firms choose the prices at which they sell their water each firm has constant marginal cost of $10 market demand is Q = 100 - 2P Check that with this demand and these costs the monopoly price is $30 and quantity is 40 units
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ECO 171 Industrial Organization Bertrand competition (cont.) We need the derived demand for each firm demand conditional upon the price charged by the other firm Take firm 2. Assume that firm 1 has set a price of $25 if firm 2 sets a price greater than $25 she will sell nothing if firm 2 sets a price less than $25 she gets the whole market if firm 2 sets a price of exactly $25 consumers are indifferent between the two firms the market is shared, presumably 50:50 So we have the derived demand for firm 2 – q 2 = 0 if p 2 > p 1 = $25 – q 2 = 100 - 2p 2 if p 2 < p 1 = $25 – q 2 = 0.5(100 - 50) = 25 if p 2 = p 1 = $25
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This note was uploaded on 04/10/2010 for the course ECONOMICS 171 taught by Professor Hopenhayn during the Winter '10 term at UCLA.

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bertrand-1 - Price Competition: Bertrand In the Cournot...

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