Price competition and convex costs

No 622, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: In the original model of pure price competition, due to Joseph Bertrand (1883), firms have linear cost functions. For any number of identical such price-setting firms, this results in the perfectly competitive outcome; the equilibrium price equal the firms’ (constant) marginal cost. This paper provides a generalization of Bertrand’s model from linear to convex cost functions. I analyze pure price competition both in a static setting - where the firms interact once and for all - and in dynamic setting - where they interact repeatedly over an indefinite future. Sufficient conditions are given for the existence of Nash equilibrium in the static setting and for subgame perfect equilibrium in the dynamic setting. These equilibrium sets are characterized, and it is shown that there typically exists a whole interval of Nash equilibrium prices in the static setting and subgame perfect equilibria in the dynamic setting. It is shown that firms may earn sizable profits and that their equilibrium profits may increase if their production costs go up.

Keywords: Bertrand competition (search for similar items in EconPapers)
JEL-codes: D43 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2006-02-14, Revised 2006-02-23
New Economics Papers: this item is included in nep-com, nep-ind and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:hhs:hastef:0622

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