Question

In a Bertrand duopoly with product differentiation explain how a change in one firm's marginal cost can have an effect on the price charged by the other firm.

Answer 1

Answer is :

Bertrand proposed an alternative to Cournot’s duopoly model. From a game theory perspective, a simultaneous game, the strategic choice is on prices, rather than quantities.

In Bertrand model consumers buy products from the firm that offers a low price. Thus, the Nash equilibrium is going to be the two firms setting the same price.

In case of product differentiation, each firm's price is a function of the other firm's price. If one firm incurs an increase in marginal cost, it raises its price. This, in turn, would cause the other firm to raise its price.