Re: DSE 2012 Doubts

Posted by MR on Jun 18, 2013; 7:29am
URL: http://discussion-forum.276.s1.nabble.com/DSE-2012-Doubts-tp7582497p7582504.html

The 23rd question is on bertrand model price competition duopoly. As you must have read that in Bertrand model by the end due to cut throat competition amongst firms the nash equilibrium is to charge P=MCi, where i denotes the number of firm like i=1,2,3.....n. But this is a situation with capacity constraint. So the nash equilibrium amongst these firms will be to charge the higher MC as their price. As the firm with the lower MC gets the entire market share as the products are homogenous. So though this firm has lower MC it should not cut the price of the rival firm because as it is, it cannot by itself satisfy the entire market. So the answer is 6.