Geography Reference
In-Depth Information
p
b
Firm
A'
s best response function:
p
a
= r
a
(
p
b
)
Firm
B'
s best response function:
p
b
= r
b
(
p
a
)
MC
b
MC
a
p
a
Figure 3.16
Bertrand best price responses
first, because in doing so, the other firm will then be able to maintain its
current prices at the centre of the market and therefore will dominate
a larger market area than the firm which moved away from the centre.
In an environment of potential price as well as spatial competition this
problem of instability in which all firms have an incentive to move away
from each another, but no firm has any incentive to move first, can only
be solved in one of two possible ways. One way to solve the problem is
if firms are able to find a way to avoid moving too close together in the
first place (d'Aspremont et al. 1979). However, this requires a level of
implicit or explicit collusion. Therefore, unless there is some way in which
the firms can cooperate and mutually agree to move away from each
other, a price war always becomes inevitable and the Bertrand problem
remains.
An alternative way of avoiding the Bertrand problem is to find a way
to avoid price competition altogether. The most common means of doing
this is to employ non-price competition, in which firms compete primarily
on other issues, such as product or service quality, design and variation.
In these non-price competition models, firms mutually agree not to cut
prices, but to try to win consumers by the quality and variety of their
products. This type of competition also involves issues such as branding,
advertising, logos and customization. As such, when firms are competing
