Which alteration of the assumptions behind the Bertrand model can help avoid the Bertrand Paradox (that an outcome resembling perfect competition may arise with even as few as two firms)?
A)assume firms have limited capacities.
B)assume firms produce differentiated rather than homogeneous products.
C)assume firms play repeatedly and thus may collude.
D)all of the above.

Question

Quizplus · Accepted Answer

Assuming firms have limited capacities would lead to higher prices and profits, as firms would not be able to meet demand at the same quantity and price as in perfect competition. Assuming firms produce differentiated products would also prevent perfect competition and potentially lead to price and profit differentiation. Finally, assuming firms play repeatedly and may collude would also prevent perfect competition and lead to higher prices and profits. Together, these three assumptions can help avoid the Bertrand Paradox.

Which Alteration of the Assumptions Behind the Bertrand Model Can