This 30-minute module can serve as an introduction to Bertrand Competition or to build intuition following a lecture on the Bertrand Paradox. This module has the following learning objectives:
Each student acts as a firm engaged in a duopolistic Bertrand competition for selling course notes. Each pair of students interacts across five rounds of play. In each round, players must simultaneously decide on a price to charge for course notes in the current round. The firm that posted the lowest price receives all of the sales for that round.
Each unit of course-notes costs $\$2$ to produce ($MC = \$2$). The market demand for course notes is given by $Q(P)=100(36-2P)=3600-200P$. The Nash Equilibrium price in a Bertrand duopoly competition is $P=MC=\$2$. At this price, the total market quantity is $Q=3200$ and is split evenly between the two firms, $q_1=q_2=1600$ . Each firm earns zero profit in equilibrium.
The first game in this module is a baseline Bertrand game. In the second game chat and indefinite repetition are enabled to facilitate collusive arrangements. This should result in higher prices and lower consumer welfare.
(Figure 1: Typical Market Price Results from Bertrand Competition. Click to expand)
(Figure 2: Typical Posted Price Results from Bertrand Competition. Click to expand)