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Strategic Profit Sharing Between Firms: The Bertrand Model

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  • Roberts Waddle

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    Abstract

    The present paper first considers two firms in a homogeneous market competing in a two-stage game. Using a particular strategy, it shows that firms may be able to set prices above the marginal costs and thus get positive profits. This remarkable result is robust to the number of firms and to cost asymmetries. Furthermore and more importantly, when firms' costs are different, firms obtain positive profits even though they set prices at the highest marginal cost.

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    File URL: http://docubib.uc3m.es/WORKINGPAPERS/WE/we050902.pdf
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    Bibliographic Info

    Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we050902.

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    Date of creation: Feb 2005
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    Handle: RePEc:cte:werepe:we050902

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    1. Allen, Beth & Hellwig, Martin, 1986. "Price-Setting Firms and the Oligopolistic Foundations of Perfect Competition," American Economic Review, American Economic Association, vol. 76(2), pages 387-92, May.
    2. Vives, Xavier, 1986. "Rationing rules and Bertrand-Edgeworth equilibria in large markets," Economics Letters, Elsevier, vol. 21(2), pages 113-116.
    3. Raymond Deneckere & Dan Kovenock, 1988. "Price Leadership," Discussion Papers 773, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    4. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
    5. Maskin, Eric & Tirole, Jean, 1988. "A Theory of Dynamic Oligopoly, II: Price Competition, Kinked Demand Curves, and Edgeworth Cycles," Econometrica, Econometric Society, vol. 56(3), pages 571-99, May.
    6. Carl Davidson & Raymond Deneckere, 1986. "Long-Run Competition in Capacity, Short-Run Competition in Price, and the Cournot Model," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 404-415, Autumn.
    7. Oz Shy, 1996. "Industrial Organization: Theory and Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262691795, December.
    8. Borgers, Tilman, 1992. "Iterated Elimination of Dominated Strategies in a Bertrand-Edgeworth Model," Review of Economic Studies, Wiley Blackwell, vol. 59(1), pages 163-76, January.
    9. Dasgupta, Partha & Maskin, Eric, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," Review of Economic Studies, Wiley Blackwell, vol. 53(1), pages 1-26, January.
    10. Antón García Díaz & Praveen Kujal, 2003. "List Pricing And Pure Strategy Outcomes In A Bertrand-Edgeworth Duopoly," Economics Working Papers we034918, Universidad Carlos III, Departamento de Economía.
    11. Allen, Beth & Hellwig, Martin, 1986. "Bertrand-Edgeworth Oligopoly in Large Markets," Review of Economic Studies, Wiley Blackwell, vol. 53(2), pages 175-204, April.
    12. Dixon, Huw, 1987. "Approximate Bertrand Equilibria in a Replicated Industry," Review of Economic Studies, Wiley Blackwell, vol. 54(1), pages 47-62, January.
    13. Dixon, Huw, 1990. "Bertrand-Edgeworth Equilibria when Firms Avoid Turning Customers Away," Journal of Industrial Economics, Wiley Blackwell, vol. 39(2), pages 131-46, December.
    14. Levitan, Richard & Shubik, Martin, 1972. "Price Duopoly and Capacity Constraints," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(1), pages 111-22, February.
    15. Maskin, Eric, 1986. "The Existence of Equilibrium with Price-Setting Firms," American Economic Review, American Economic Association, vol. 76(2), pages 382-86, May.
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