Bertrand paradox (economics)
transl. de:Bertrand-Paradox
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- There is another, different, Bertrand's paradox related to probability; see Bertrand's paradox (probability). This article is about Bertrand's paradox in economics.
Example
When two companies (A and B) sell an identical product (e.g. CDs), with the same marginal cost, their total demand will depend on the price. It means that neither A nor B will set a higher price than the rival. If they set the same price, the companies will share both the market and profits equally. But both actors will regret their choices because to lower the price with only one unit (1 NOK) will result in gaining the whole market and substantially larger profits. Since both A and B knows this they will constantly compete on price and subsequently, Nash equilibrium will be reached at the point where price equals marginal cost making profits equal zero, Bertrand paradox.
However, Bertrand paradox rarely appears in practice because:
- differentiation of the products
- actors have capacity limitations
- repeated game