Bertrand competition is a marketing model where entities determine prices for the same or similar services, assuming competitors won’t change prices. It helps determine competitive prices, assess market share and predict global price changes. However, it only considers price competition and does not measure other motivating factors.
Bertrand competition is a marketing model in which two or more parties determine prices for the same items or similar services at the same time; make decisions with the belief that competitors will not make price changes. It is based on the assumption that the entities in question do not cooperate or collude. By using the price information for each entity in a mathematical equation, it is believed that the most competitive price can be plotted. The term was named for Joseph Bertrand, a French mathematician who developed mathematical equations to demonstrate the phenomenon.
There are four basic symbols used in a Bertrand competition equation: MC for marginal cost, p1 for the price level of one firm, p2 for the price level of two firms, and pM for the monopoly price level. These symbols allow you to express price information as a mathematical equation. The information can then be mapped onto a graph with these symbols as well.
In addition to helping determine competitive prices, Bertrand’s equations of competition can help assess market share and potential loss, and predict global price changes. The overall goal demonstrated by this model is to gain more market share while remaining profitable. This means that entities can lower prices to gain more customers, but must keep prices above marginal cost in order to avoid a loss.
Bertrand’s competition model only considers that entities will compete based on price. It does not consider things other than prices that an entity may value such as customer loyalty, longevity, and influence. Bertrand’s competition also does not effectively measure what other elements than price might motivate a potential customer such as convenience.
This model tends to be a more effective measure than a duopoly as this means both entities have the ability to capture and service an entire market. When there are multiple entities involved, it becomes less and less likely that a single organization can manage the dominance of the market. For this reason, the success of the model strongly depends on the capabilities of the entities involved.
The Bertrand competition model is often used as an exercise in the marketing curriculum. Its mathematical equations can be calculated by hand or with software that can help increase understanding by graphing the data for each entity. There are websites that perform this function as well.
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