Crush and Frenzy both produce motorized bicycles, which are identical in all aspects. The total demand in this market is for Q motorized bicycles. The price of Crush's bicycle is P_C and the price of Frenzy's bicycle is P_F. If the firms are engaged in Bertrand competition, which of the following statements is TRUE?

Question

Quizplus · Accepted Answer

In Bertrand competition, firms compete on price and consumers will always choose the lower price. Since the two bicycles are identical, if one firm chooses a price that is lower than the other firm's price, all consumers will buy from that firm, causing the other firm to have zero demand. In this case, the firms have different prices, so they will not have equal market shares. Therefore, statement II is true. However, statement I is not necessarily true because we do not know if the prices are equal to each firm's cost, and statement III is not necessarily true because we do not know the firms' profits or whether they are maximizing profits.

Crush and Frenzy Both Produce Motorized Bicycles, Which Are Identical