Bertrand Paradox

Bertrand Paradox

Before the “hangover”?

Published in Jason Monios, Gordon Wilmsmeier, Maritime Mobilities, 2017

Gordon Wilmsmeier, Marta Gonzalez-Aregall, Ricardo J. Sánchez

Hence we observe competition on prices – i.e., Bertrand model. In this model, firms set prices rather than output. Assuming perfect information and identical products, the consumers buy the product with the lowest price. In the equilibrium, when each firm sets a price equal to marginal cost, each firm is maximizing its own profit. However, if the marginal cost is lower, there will be an incentive for firms to lower their prices. This situation, referred to as the Bertrand Paradox, yields the same result of fair perfect competition (Martin, 2010) and may reduce the number of sellers to the few ones that are more cost efficient and bigger.

The performance of logistics service providers and the logistics costs of shippers: a comparative study of Finland and Switzerland

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Journal Information

Published in International Journal of Logistics Research and Applications, 2018

Tomi Solakivi, Erik Hofmann, Juuso Töyli, Lauri Ojala

As proposed in the classic model of price competition, equilibrium entails that price is equal to marginal cost whenever at least two firms are in the market (Bertrand 1883). However, real-life observations are not in line with this theoretical assumption: in reality, firms are able to charge prices exceeding the marginal cost, a phenomenon known as the Bertrand Paradox. Furthermore, it has been shown that when it is a question of market power, prices are less dependent on marginal costs and more dependent on other characteristics such as the price and import elasticity of goods transportation, as well as the tariffs imposed on the goods (Hummels, Lugovskyy, and Skiba 2009).

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Before the “hangover”?

The performance of logistics service providers and the logistics costs of shippers: a comparative study of Finland and Switzerland