Question
In: Economics
Why is P = MC the result of Bertrand competition? Explain in terms of dominant strategies....
Why is P = MC the result of Bertrand competition? Explain in
terms of dominant
strategies. You may use a best-response graph or a pay-off matrix
to help your
explanation, but neither is required.
Solutions
Expert Solution
* In Bertrand model firms determine price simultaneously.When product is homogenous then each firm will charge price equal to marginal cost. (P=MC).
*This is because if one firm charges price greater than MC than competitors can reduce price slightly to get entire market.This is because products are perfect substitute.In this situation there will be no incentive for any firm to deviate from their pricing strategy. In that sense it is Nash Equilibrium.
* This result is also known as Bertrand paradox because despite having only two firms the outcome is similar to competitive market output.Therefore Nash equilibrium of the Bertrand game is P1=P2=MC.
*When firm produces differentited product then equilibrium price is determined by intersection of best response curve (Reaction curve). It represents profit maximizing price that will be charged by a firm for a given price charged by competitor.The intersection of best response curve represents nash equilibrium.
Rahul Sunny answered 2 years agoRelated Solutions
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