Question

Firms can either compete via the quantity produced or via price competition. What is the name...

  1. Firms can either compete via the quantity produced or via price competition.
    1. What is the name of the oligopoly model that investigates price competition with homogeneous products?
    1. Using the model in part (a) and assuming that both firms have identical costs, what will the equilibrium price be equal to? Explain in no less than 3 sentences the iterative process/reasoning behind this conclusion.
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Answer #1

a) Bertrand Model. The Bertrand model of oligopoly investigates price competition with homogeneous products.

b) In the Bertrand model, assuming that both firms have identical costs, the equilibrium price will be equal to the marginal cost. If both firms set a competitive price with the price equal to marginal cost, neither firm will earn any profits. However, if one firm sets price equal to marginal cost, then if the other firm raises its price above unit cost, then it will earn nothing since all consumers will buy from the firm still setting the competitive price. And the firm will have no incentive to reduce the price as they are already able to sell at a competitive price.

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