1. Definition
The Bertrand model, named after the French mathematician Joseph Bertrand, describes price competition between two or more companies producing identical products and competing in a homogeneous market. In this model, companies use price as a strategic variable to gain market share, and consumers always buy from the cheapest supplier. The Bertrand equilibrium occurs when prices fall to the level of marginal costs, as companies lower prices to undercut competitors.
2. Application in Industry
The Bertrand model is often used to analyze the behavior of firms in markets with intense price competition, such as industries producing homogeneous goods like raw materials, basic chemicals, and certain consumer products. In these markets, price competition often leads to prices close to production costs, keeping profit margins low. The model is also used to examine the effects of entry barriers or monopoly power.
3. Types of Bertrand Models
- Classic Bertrand Model: The standard model with two companies offering identical products and using price as a competitive tool.
- Differentiated Bertrand Model: An extension where firms offer differentiated products, allowing different prices since the products are not perfect substitutes.
- Stochastic Bertrand Model: A variant incorporating uncertainty regarding demand or costs to simulate more realistic market conditions.