Bertrand bidding is a marketing model where entities simultaneously price the same or similar items, assuming competitors won’t change prices. It helps determine competitive pricing, market share, and potential loss. However, it only considers price and is more effective in a duopoly.
Bertrand bidding is a marketing model in which two or more parties price the same or similar items or services simultaneously; making 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 with each other. Using information about the price of each entity in a mathematical equation, it is believed to be possible to map the most competitive price. The term was named for Joseph Bertrand, a French mathematician who developed mathematical equations to demonstrate the phenomenon.
There are four basic symbols that are used in a Bertrand competition equation: MC for marginal cost, p1 for firm price level, p2 for firm two price level, and pM for monopoly price level. These symbols allow you to express price information as a mathematical equation. Information can also be mapped onto a graph with these symbols.
In addition to helping determine competitive pricing, Bertrand’s competition equations can help you assess market share and potential loss and predict overall price changes. The overall objective demonstrated by this model is to gain more market share and remain profitable. This means that entities can lower prices to win more customers, but must keep prices above marginal cost to avoid losses.
The Bertrand competition model only assumes that entities will compete on the basis of price. It does not take into account elements other than price that might be valued by an entity, such as customer loyalty, longevity, and influence. Bertrand’s competition also doesn’t really measure what elements other than price would motivate a potential customer, such as convenience.
This model tends to be a more effective measure of a duopoly, as it means that both entities have the capacity to capture and serve an entire market. When more entities are involved, it becomes less and less likely that any one organization can handle market dominance. For this reason, the success of the model depends a lot on the capabilities of the entities involved.
The Bertrand competition model is often used as an exercise in the marketing curriculum. Your mathematical equations can be calculated manually or with software that can help increase understanding by graphing each entity’s data. There are websites that perform this function as well.
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