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Bertrand's price competition in markets with fixed costs

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This paper provides necessary and sufficient conditions for the existence of a pure strategy Bertrand equilibrium in a model of price competition with fixed costs. It unveils an interesting and unexplored relationship between Bertrand competition and natural monopoly. That relationship points out that the non-subadditivity of the cost function at the output level corresponding to the oligopoly break-even price, denoted by D(pL (n)), is sufficient to guarantee that the market supports a (not necessarily symmetric) Bertrand equilibrium in pure strategies with two or more firms supplying at least D(pL (n)). Conversely, the existence of a pure strategy equilibrium ensures that the cost function is not subadditive at every output greater than or equal to D(p(n)).

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File URL: http://rcer.econ.rochester.edu/RCERPAPERS/rcer_549.pdf
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Paper provided by University of Rochester - Center for Economic Research (RCER) in its series RCER Working Papers with number 549.

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Length: 29 pages
Date of creation: May 2009
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Handle: RePEc:roc:rocher:549

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Postal: University of Rochester, Center for Economic Research, Department of Economics, Harkness 231 Rochester, New York 14627 U.S.A.

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Keywords: Bertrand competition; cost subadditivity; fixed costs; natural monopoly.;

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  1. Abbink, Klaus & Brandts, Jordi, 2008. "24. Pricing in Bertrand competition with increasing marginal costs," Games and Economic Behavior, Elsevier, Elsevier, vol. 63(1), pages 1-31, May.
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  15. Todd R. Kaplan & David Wettstein, 2000. "The possibility of mixed-strategy equilibria with constant-returns-to-scale technology under Bertrand competition," Spanish Economic Review, Springer, Springer, vol. 2(1), pages 65-71.
  16. Shapiro, Carl, 1989. "Theories of oligopoly behavior," Handbook of Industrial Organization, Elsevier, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 6, pages 329-414 Elsevier.
  17. Spulber, Daniel F, 1995. "Bertrand Competition When Rivals' Costs Are Unknown," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 43(1), pages 1-11, March.
  18. Chaudhuri, Prabal Ray, 1996. "The contestable outcome as a Bertrand equilibrium," Economics Letters, Elsevier, Elsevier, vol. 50(2), pages 237-242, February.
  19. Makoto Yano, 2006. "A price competition game under free entry," Economic Theory, Springer, Springer, vol. 29(2), pages 395-414, October.
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