1. How do Coca-Cola
and Pepsi determine
prices?
Explaining the Bertrand Model of Competition
By: Brian Camp, Justin Winston, Kiy Webb, Brice Ndayisenga and Breon Weathersby and Robin McKinnie
2. Joseph Louis Francois Bertrand
•Born March 11, 1822 and died in
Paris on April 5 1900
•Mathematician who worked in
the fields of number theory,
differential geometry, probability
theory, economics and
thermodynamics
•Professor at Ecole Polytechnique
3. Joseph Louis Francois Bertrand Cont.
Contributions to economics was his
reviewed work on oligopoly theory
•Identified key error in the Cournot
Competition Model of French
mathematician Antoine Augustin
Cournot
•Used prices rather than quantities
as the strategic variables, thus
showing that the equilibrium price
was simply the competitive price
4. What is an Oligopoly?
Market in which:
● Few firms compete
● Barriers to entry
● Products may be differentiated (automobiles)
or homogeneous (steel)
5. Examples
1. Coca Cola vs. Pepsi
- In the market of soda products
1. Visa vs. Mastercard
- In the market of electronic payment processing
1. Airbus vs. Boeing
- In the market of large commercial airplanes
6. π = Revenue(R) - Cost(C)
Homogeneous Products
-MC = P
Differentiated Products
-Within the Bertrand Competition Model, we will assume that
marginal cost equals zero.
π = R - C
-Thus, making revenue the main focus for this model.
R=Price X Quantity
7. Bertrand Model Environment
● Treats the price of competitors as fixed, and all firms decide
simultaneously what price to charge
● Few firms that sell to many consumers
● Firms produce differentiated but highly substitutable products
at constant marginal cost
● Each firm independently sets its price in order to maximize
profits (Price is each firm’s control variable)
● Barriers to entry exist.
● Consumers enjoy perfect information
● Firms price at marginal cost and make no profit
8. Bertrand Model Critical Analysis
● Assumes firms compete purely on price, ignoring non-price
competition such as quantity, promotion, place
● Assumes that sales are divided equally among the competing firm
and that the firm,in undercutting its competitor, is able to meet the
full demand of the market.
● Assumes that the pricing game is a one shot game, however, in a
dynamic competition, repeated price competition can lead to an
equilibrium price above MC.
● Assumes products are identical, whereas in reality, most firms
produce products that at least, their consumers perceive as
different from a rival's.
