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 equal to 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, the firms are selling products that are slightly different from each other. They are competing on price, and each firm takes the price of the other firm as given while determining their own price. In this situation, both firms have an incentive to undercut the other firm's price to increase their own sales volume. This leads to a price war, and the outcome is that both firms end up setting a price that is lower than the price they would have set in a monopoly. However, since the products are differentiated, they are not exactly the same, and consumers are willing to pay a premium to get the product they prefer. Therefore, firms can charge a price that is higher than the marginal cost, but not as high as the monopoly price. In other words, both firms will set a price that exceeds the marginal cost to earn a positive economic profit.

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