Social power as a solution to the Bertrand Paradox

Soeiro, Renato and Adrego Pinto, Alberto (2019): Social power as a solution to the Bertrand Paradox.

Abstract

We show that in a duopoly with homogeneous consumers, if these are negatively influenceable by each other behavior (e.g. congestion/ snob/ Veblen/ network effects), a pure price equilibrium with positive profits for both firms exists. Furthermore, even in the case products are undifferentiated, an equilibrium where firms charge different (positive) prices and have different profits exists. Thus, when firms engage in uniform price competition, heterogeneity, and in particular non-atomicity in the distribution of preferences, is neither a necessary condition to ensure existence, nor to achieve asymmetries. We further show that in the case products are differentiated, social differentiation overcomes the effect of standard differentiation in creating price asymmetries.

• Item Type: MPRA Paper
• Language: English
• Keywords: Social influence; Bertrand duopoly; Bertrand competition; network effects; product differentiation; homogeneous products; pure price equilibrium; linear demand.
• Subjects: C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C72 - Noncooperative Games; D - Microeconomics > D0 - General > D00 - General; D - Microeconomics > D0 - General > D01 - Microeconomic Behavior: Underlying Principles; D - Microeconomics > D0 - General > D03 - Behavioral Microeconomics: Underlying Principles; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D40 - General; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection; L - Industrial Organization > L0 - General > L00 - General; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets

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