Bertrand Competition
What is Bertrand Competition?
Bertrand competition is an oligopoly model where firms simultaneously set prices, and consumers buy from whoever charges less.
With identical products and equal constant costs, price competition drives firms to undercut each other until price equals marginal cost, giving the competitive outcome and zero economic profit even with only two firms, the Bertrand paradox. The result is sensitive to assumptions: product differentiation, capacity limits, or repeated play restore positive profits.
Bertrand Competition: a worked example
Two firms sell an identical product at a marginal cost of $4, facing market demand Q = 120 - 10P. Suppose both post $10. Quantity is 120 - 100 = 20 units, split 10 apiece, so each earns ($10 - $4) x 10 = $60. Now firm A shaves its price to $9.90. It takes the entire market, 120 - 99 = 21 units, for a profit of $5.90 x 21 = $123.90, more than double what splitting the market paid. Firm B faces that same incentive at every price above $4, so the undercutting continues until both charge $4 and both earn zero.
The mistake students make with bertrand competition
The tempting wrong answer is that undercutting halts somewhere above marginal cost, at the point where a further cut stops paying. It never does. At any price above $4 in the example, a firm splitting the market can capture all of it by shaving one cent, and roughly doubling volume swamps the cent lost on each unit. The second slip is picturing the higher-priced firm keeping a few loyal buyers. With genuinely identical goods and no capacity limit, the firm quoting the higher price sells nothing at all.
Bertrand Competition questions
What is the bertrand paradox?
The Bertrand paradox is the result that just two price-setting firms with identical products and identical constant costs push price all the way down to marginal cost, wiping out economic profit. It earns the name because it contradicts the usual intuition that fewer sellers means higher prices, and because real duopolies visibly earn profits. Differentiation, capacity limits and repeated play are the standard resolutions.
What is the difference between bertrand and cournot competition?
Bertrand and Cournot differ in what firms choose. Bertrand firms set prices, Cournot firms set quantities, and that single switch changes the answer sharply: Bertrand with identical goods gives price equal to marginal cost and zero profit, while Cournot gives price above marginal cost and positive profit. Cournot suits industries where capacity is locked in ahead of time; Bertrand suits industries where output can be scaled up quickly.
How do firms escape bertrand competition?
Firms escape Bertrand competition by breaking one of its assumptions. Differentiating the product means a rival's lower price no longer takes every customer, so each firm keeps its own downward-sloping demand curve. Capacity limits mean the cheaper firm physically cannot serve the whole market, leaving residual demand for the other. Repeated interaction lets firms hold prices up by threatening to punish any undercutting in later rounds.
Formula / Example
Related terms
Common comparisons
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