In the Bertrand model of duopoly, each firm sets its price, believing that the other's price will not change.When both firms have identical production functions and produce with constant returns to scale, the Bertrand equilibrium price is equal to marginal cost.

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This is known as the Bertrand paradox, which arises because each firm has an incentive to undercut the other's price in order to capture the market. As a result, the prices are driven down to the competitive level, which is equal to marginal cost in perfect competition.

In the Bertrand Model of Duopoly, Each Firm Sets Its