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As a solution to the Bertrand paradox in economics, it has been suggested that each firm produces a somewhat differentiated product, and consequently faces a demand curve that is downward-sloping for all levels of the firm's price.
Contents
An increase in a competitor's price is represented as an increase (for example, an upward shift) of the firm's demand curve.
As a result, when a competitor raises price, generally a firm can also raise its own price and increase its profits.
Calculating the differentiated Bertrand model
The above figure presents the best response functions of the firms, which are complements to each other.
Uses
Merger simulation models ordinarily assume differentiated Bertrand competition within a market that includes the merging firms.
References
Differentiated Bertrand competition Wikipedia(Text) CC BY-SA