Which of the following is a main objection to the standard Bertrand model of price competition...

Which of the following is a main objection to the standard Bertrand model of price competition that we have discussed?

Group of answer choices

The assumption that firms are not capacity constrained may be unrealistic.

The model predicts that equilibrium profit per-unit is strictly negative.

The model uses too much math.

The assumption that firms directly set their own prices is unrealistic.

Expert Solution

The answer is (a) The assumption that firms are not capacity constrained may be unrealistic

In the Bertrand model, a firm that can undercut the other in terms of prices will get the entire market. But in the short run, firms face capacity constraints and may not be able to serve the entire and this is where the assumption of not capacity constrained may be unrealistic.and will lead to different outcomes in theory and practice.

All other options are incorrect as they are realistic assumptions.

Rahul Sunny answered 2 years ago

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