Bertrand competition - Definition

Bertrand competition is a model of competition used in economics. Specifically it is a model of price competition between duopoly firms in which each charges the price that would be charged under perfect competition, known as marginal cost pricing. It differs from the Cournot model which finds that in a duopoly prices and output will be somewhere between monopoly levels and perfect competition levels.

In the Bertrand game, a model for Bertrand competition, both firms compete solely on price and then supply the quantity demanded. Consumers buy everything from the cheaper firm or half at each, if the price is equal. There are two plausible outcomes: colluding to charge the monopoly price and supplying one half each, or via a "race to the bottom", charging average cost, which is the non-cooperative Nash equilibrium outcome. If one firm has lower average cost (a superior production technology), it will charge an "infinitely samller" price than the average cost of the other one and take all the business. An example for Bertrand duopoly are two adjacent gas stations.