Differentiated Bertrand competition

As a solution to the Bertrand paradox in economics, it has been suggested that each firm produces a somewhat differentiated product, and consequently faces a demand curve that is downward-sloping for all levels of the firm's price.

An increase in a competitor's price is represented as an increase (for example, an upward shift) of the firm's demand curve.

As a result, when a competitor raises price, generally a firm can also raise its own price and increase its profits.

Calculating the differentiated Bertrand model

The above figure presents the best response functions of the firms, which are complements to each other.

Uses

Merger simulation models ordinarily assume differentiated Bertrand competition within a market that includes the merging firms.

See also

External sources


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