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Strategic Profit Sharing Between Firms: The Bertrand Model

  • Roberts Waddle

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    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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    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. Richard E. Levitan & Martin Shubik, 1970. "Price Duopoly and Capacity Constraints," Cowles Foundation Discussion Papers 287, Cowles Foundation for Research in Economics, Yale University.
    2. 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.
    3. 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.
    4. Maskin, Eric, 1986. "The Existence of Equilibrium with Price-Setting Firms," American Economic Review, American Economic Association, vol. 76(2), pages 382-86, May.
    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. Raymond Deneckere & Dan Kovenock, 1988. "Price Leadership," Discussion Papers 773, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    7. 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.
    8. Oz Shy, 1996. "Industrial Organization: Theory and Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262691795, June.
    9. Dixon, Huw, 1987. "Approximate Bertrand Equilibria in a Replicated Industry," Review of Economic Studies, Wiley Blackwell, vol. 54(1), pages 47-62, January.
    10. Vives, Xavier, 1986. "Rationing rules and Bertrand-Edgeworth equilibria in large markets," Economics Letters, Elsevier, vol. 21(2), pages 113-116.
    11. 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.
    12. 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.
    13. 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.
    14. 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.
    15. Allen, Beth & Hellwig, Martin, 1986. "Bertrand-Edgeworth Oligopoly in Large Markets," Review of Economic Studies, Wiley Blackwell, vol. 53(2), pages 175-204, April.
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