Which of the following is true about a differentiated-product Bertrand duopoly?
A)Firm 1 and firm 2's prices will exceed marginal cost.
B)Firm 1 and firm 2's prices will equal marginal cost.
C)Firm 1's price will always be above marginal cost, while firm 2's price will be greater than marginal cost.
D)Firms in a differentiated-product Bertrand duopoly cannot earn positive economic profits in the long run.

Question

Quizplus · Accepted Answer

In a differentiated-product Bertrand duopoly, firms compete on price for products that are slightly different from each other. Since consumers have some degree of preference for one firm's product over the other, each firm has some market power and can set its own price. However, if one firm sets a higher price than its competitor, consumers will switch to the lower-priced product, forcing the higher-priced firm to lower its own price in order to remain competitive. This process will continue until both firms are charging a price equal to their marginal cost. However, this outcome is not stable, as each firm has an incentive to undercut its rival's price and capture a larger share of the market. This will lead to a "price war", and both firms will eventually set a price above their marginal cost, resulting in positive economic profits.

Which of the Following Is True About a Differentiated-Product Bertrand