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November 20, 2012
Directed Search and the Bertrand Paradox
Posted by D. Daniel Sokol
Athanasios Geromichalos (Department of Economics, University of California Davis) addresses Directed Search and the Bertrand Paradox.
ABSTRACT: I study a directed search model of oligopolistic competition, extended to incorporate general capacity constraints, congestion effects, and pricing based on ex-post realized demand. I show that as long as any one of these ingredients is present, the Bertrand paradox will fail to hold. Hence, I argue that, despite the emphasis that has been placed by the literature on sellers’ capacity constraints as a resolution to the paradox, the existence of such constraints is only a subcase of a general class of environments where the paradox fails. More precisely, Bertrand’s paradox will not arise whenever the buyers’ expected utility from visiting a specific seller is decreasing in that seller’s realized demand.
November 20, 2012 | Permalink
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