In a Bertrand model with differentiated products,

Question

Quizplus · Accepted Answer

In a Bertrand model with differentiated products, firms can set price above marginal cost because they are competing with each other based on product differentiation rather than price. If one firm sets a higher price, consumers will switch to a close substitute offered by another firm, resulting in lower demand for the first firm's product. Thus, each firm has an incentive to set a higher price than its marginal cost to maximize profits.

In a Bertrand Model with Differentiated Products