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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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    Keywords

    Bertrand competition; cost subadditivity; fixed costs; natural monopoly.;
    All these keywords.

    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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