Competencia de Bertrand

A Bertrand Oligopoly is a market structure where a few firms compete on price, undercutting each other’s prices until they equal marginal cost.

Each firm has the same constant marginal cost (MC), assuming identical products and consumers choosing the cheaper option.

The firm with the lowest price captures the market until it reaches its capacity. As a result, firms set equal prices (P1 = P2 = P), which then become the market price.

For instance, two airlines, Delta and United, compete on the New York to Los Angeles route, and their marginal cost is $250.

Delta sets a one-way ticket price of $300, and United sets its price at $290 to attract more passengers.

Delta responds by lowering its price to $280; further, United lowers its price to $270.

This process continues back and forth until prices reach $250, and prices fall until they are equal to MC, the level at which further reductions would cause losses to both airlines. 

This outcome demonstrates that in Bertrand oligopoly, firms earn zero economic profit in equilibrium because price equals marginal cost