Massimo A. De Francesco

Bertrand Competition Under Excess Capacity

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The paper considers a homogeneous product market where, given capacities, boundedly rational firms compete repeatedly in prices aiming to maximiz e each period's expected profits. This is done in a context in which the Bertrand outcome obtains at an equilibrium of the static price game, which in turn is shown to require just a small amount of excess capacity if the one-firm concentration ratio is sufficiently small. A convergence result is established for the n-firm oligopoly case: prices are shown to converge in finite time to marginal cost under a very general condition on the learning process by which beliefs about rivals' prices are formed, a condition that is self-ful filling over the entire adjustment process.

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