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8)The Bertrand model suggests that duopolistic firms competing on price will, jointly, produce the same quantity...

8)The Bertrand model suggests that duopolistic firms competing on price will, jointly, produce the same quantity and charge the same price as perfectly competitive firms. True or False? Explain.

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Answer #1

True.

Above statement is true. In bertrand model, firms determine price simultaneously. When product is homogeneous then each firm will charge price equal to MC, which perfectly competitive firms also do. This is because, when one firm charges price greater than MC, then competitors can reduce price slightly to get entire market. It happens because products are perfect substitutes. In this situation there will be no incentive to for any given firm to deviate from their pricing policy and in that sense it is Nash equilibrium.

Further, this situation is also known as bertrand paradox because despite having only two firms in market, outcome is similar to competitive outcome.

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