The Bertrand solution revisited: strategic price setting

Abstract

The industrial organization literature typically uses different models of strategic interaction to represent different degrees of competitive intensity. The current work shows how the Bertrand solution can converge towards the Cournot solution by modelling the presence of firms’ strategic behaviours during the process of mutual price adjustment that takes place until the equilibrium solution is reached. Specifically, the results of this work show how price competition between firms can lead to an equilibrium solution with a lower competitive intensity than initially expected. The author illustrates this process using a concrete example. Introducing the concept of rational altruism, the author shows how firms can have an incentive to strategically modify their reaction functions and, as a consequence, to increase their prices.