Table of Contents
- 1 What are the assumptions of the Bertrand model?
- 2 What is the market equilibrium in Bertrand competition with identical goods?
- 3 What happens to the homogeneous good Bertrand equilibrium price if the number of firms increases?
- 4 Do firms earn greater profits in Bertrand and Cournot competition?
- 5 Which of the following describes a Nash equilibrium?
- 6 Is Bertrand competition good for firms?
What are the assumptions of the Bertrand model?
Assumptions of Bertrand Competiton
- No co-operation between firms and no attempt to collude and fix higher prices.
- A homogenous product which consumers are indifferent between.
- No search and transaction costs.
- Firms can easily increase output and there are no capacity constraints.
What is the market equilibrium in Bertrand competition with identical goods?
With identical firms and products, if one firm is charging more than its marginal cost, the other firm always has an incentive to undercut. Even though competition is imperfect, in Bertrand competition, market equilibrium is identical to perfect competition and price equals marginal cost.
What happens to the homogeneous good Bertrand equilibrium price if the number of firms increases?
What happens to the homogeneous-good Bertrand equilibrium price if the number of firms increases? will not affect the equilibrium price.
What is Bertrand Nash equilibrium?
In a Bertrand model of oligopoly, firms independently choose prices (not quantities) in order to maximize profits. This is accomplished by assuming that rivals’ prices are taken as given. The resulting equilibrium is a Nash equilibrium in prices, referred to as a Bertrand (Nash) equilibrium.
Is Bertrand Model Nash equilibrium?
Note that the Bertrand equilibrium is a weak Nash-equilibrium. The firms lose nothing by deviating from the competitive price: it is an equilibrium simply because each firm can earn no more than zero profits given that the other firm sets the competitive price and is willing to meet all demand at that price.
Do firms earn greater profits in Bertrand and Cournot competition?
Vives (1985) and Singh and Vives (1984) found that Bertrand competition results in higher consumer surplus, lower profits and higher overall welfare than Cournot competition in a duopoly model where goods are substitutes and the firms’ only choice variable is either price or output.
Which of the following describes a Nash equilibrium?
The Nash equilibrium is a decision-making theorem within game theory that states a player can achieve the desired outcome by not deviating from their initial strategy. In the Nash equilibrium, each player’s strategy is optimal when considering the decisions of other players.
Is Bertrand competition good for firms?
Bertrand competition is a model of competition in which two or more firms produce a homogenous good and compete in prices. Theoretically, this competition in prices, providing the goods are perfect substitutes, ends with the firms selling their goods at marginal costs and thus making zero profits.
What is the equilibrium price in Bertrand competition?
In this model, consumers will buy from the firm that offers the lowest price, so we can easily have the intuition that the Nash equilibrium is going to be the two firms setting the same price. Bertrand’s equilibrium occurs when P1=P2=MC, being MC the marginal cost, yielding the same result as perfect competition.
How is Nash equilibrium determined?
There is not a specific formula to calculate the Nash equilibrium, but rather it can be determined by modeling out different scenarios within a given game to determine the payoff of each strategy and which would be the optimal strategy to choose.
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