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A Model of Bertrand Competition with Asymmetric Demand

In: Eurasian Business and Economics Perspectives

Author

Listed:
  • Alexandra Vintila

    (Bucharest University of Economic Studies)

  • Mihai Daniel Roman

    (Bucharest University of Economic Studies)

Abstract

The substantiation of the price decision is an interactive and complex decision-making process that involves rational choices resulting in the positioning of a firm on the market. This paper addresses static Bayesian games to highlight the behavior of firms in conditions of a duopoly market in asymmetric information. Based on hypothetical data, we define a multi-linear demand function and the optimization program at the level of each firm in order to determine the Bayesian equilibrium of the game. The strategy space is defined by the prices set by the firms, while the type of firms is given by the level of different demand for each type of company. Since the demand requested on the market is indeterminate, one firm makes assumptions regarding the level of the opponent’s demand, thus outlining the player’s beliefs. We observed that equilibrium prices depend on the following exogenous factors: the demand parameters, the marginal cost of each type of company and the probability with which a firm makes assumptions regarding the opponent’s demand function. We find that a firm can set a higher price than its opponent under the assumption of a probability that tends to 0. If the probability to face a specific type of company is zero or one, we obtain solutions of a model in complete information.

Suggested Citation

  • Alexandra Vintila & Mihai Daniel Roman, 2022. "A Model of Bertrand Competition with Asymmetric Demand," Eurasian Studies in Business and Economics, in: Mehmet Huseyin Bilgin & Hakan Danis & Ender Demir (ed.), Eurasian Business and Economics Perspectives, pages 45-57, Springer.
    • Handle: RePEc:spr:eurchp:978-3-031-15531-4_3
    DOI: 10.1007/978-3-031-15531-4_3
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