Friday, December 24, 2010
Posted by D. Danie Sokol
Marie-Laure Cabon-Dhersin (Centre d'Economie de la Sorbonne - Paris School of Economics & Ecole normale supérieure de Cachan) and Nicolas Drouhin (Centre d'Economie de la Sorbonne - Paris School of Economics & Ecole normale supérieure de Cachan) ask about The end of the Bertrand Paradox?
ABSTRACT: This paper analyzes price competition in the case of two firms operating under constant returns to scale with more than one production factor. Factors are chosen sequentially in a two-stage game implying a convex short term cost function in the second stage of the game. We show that the collusive outcome is the only predictable issue of the whole game i.e. the unique non Pareto-dominated pure strategy Nash Equilibrium. Technically, this paper bridges the capacity constraint literature on price competition with the one of convex cost function, solving the Bertrand Paradox in the line of Edgeworth's research program.