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Bertrand's price competition in markets with fixed costs

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Abstract

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)).

Suggested Citation

  • Alejandro Saporiti & German Coloma, 2009. "Bertrand's price competition in markets with fixed costs," RCER Working Papers 549, University of Rochester - Center for Economic Research (RCER).
    • Handle: RePEc:roc:rocher:549
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    Cited by:

    1. Matthew Andrews & Milan Bradonjic & Iraj Saniee, 2017. "Quantifying the Benefits of Infrastructure Sharing," Papers 1706.05735, arXiv.org.
    2. Robert R. Routledge, 2009. "Testable implications of the Bertrand model," The School of Economics Discussion Paper Series 0918, Economics, The University of Manchester.

    More about this item

    Keywords

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

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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