Bertrand Paradox II
Week 6
Bertrand Paradox II Adjusting Model Assumptions
Bertrand Model
2 companies
Price competition
Identical products
Game played once
Market transparency
Infinite price elasticity
No capacity constraints
Model Assumptions (I/III)
Identical products In reality, consumers have different taste and products are differentiated
Monopolization not possible
Each seller produces a different flavour of ice cream
Game played once
In reality, game has indefinite repetitions Collusion possible through threat of retaliation
Every summer season, sellers set their prices
Model Assumptions (II/III)
Market transparency In reality, imperfect market transparency
Undercutting prices has an effect on some consumers only
Some consumers know price of one seller only
Infinite price elasticity
In reality, costs for consumers associated with switching seller Undercutting prices has limited effect
Sellers introduce loyalty programme (e.g. 10th ice cream for free)
Model Assumptions (II/III)
No capacity constraints In reality, companies have limited capacity
No incentive to induce a price war over the complete demand
Each seller can produce limited amount of ice cream only
What Firms Can Do Firms can actively influence these aspects to avoid the Bertrand trap
Agree on prices, implicitly or explicitly Play the game repeatedly, make sure there is no endpoint
Limit your capacity
Increase switching costs
Differentiate your product
Competitive Strategy Tobias Kretschmer Professor of Management, LMU Munich
© 2013 LMU Munich
Bertrand Paradox II Adjusting Model Assumptions
Bertrand Model
2 companies
Price competition
Identical products
Game played once
Market transparency
Infinite price elasticity
No capacity constraints
Model Assumptions (I/III)
Identical products In reality, consumers have different taste and products are differentiated
Monopolization not possible
Each seller produces a different flavour of ice cream
Game played once
In reality, game has indefinite repetitions Collusion possible through threat of retaliation
Every summer season, sellers set their prices
Model Assumptions (II/III)
Market transparency In reality, imperfect market transparency
Undercutting prices has an effect on some consumers only
Some consumers know price of one seller only
Infinite price elasticity
In reality, costs for consumers associated with switching seller Undercutting prices has limited effect
Sellers introduce loyalty programme (e.g. 10th ice cream for free)
Model Assumptions (II/III)
No capacity constraints In reality, companies have limited capacity
No incentive to induce a price war over the complete demand
Each seller can produce limited amount of ice cream only
What Firms Can Do Firms can actively influence these aspects to avoid the Bertrand trap
Agree on prices, implicitly or explicitly Play the game repeatedly, make sure there is no endpoint
Limit your capacity
Increase switching costs
Differentiate your product
Competitive Strategy Tobias Kretschmer Professor of Management, LMU Munich
© 2013 LMU Munich
