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Bertrand competition is a marketing model in which two or more parties determine pricing for the same or similar items or services simultaneously; making decisions with the belief that competitors will not make price changes. It is based on the assumption that the entities in question do not cooperate or collude with each other. By using the information about pricing for each entity in a mathematical equation, it is believed to be possible to chart the most competitive price. The term was named for Joseph Bertrand, a French mathematician who developed mathematical equations to demonstrate the phenomenon.
There are four basic symbols that are used in a Bertrand competition equation: MC for marginal cost, p1 for firm one’s price level, p2 for firm two’s price level, and pM for the monopoly price level. These symbols make it possible to express the pricing information as a mathematical equation. The information can then be mapped on a chart with these symbols as well.
In addition to helping to determine competitive pricing, Bertrand competition equations can help to evaluate market share and potential loss and to predict overall changes in pricing. The overall goal demonstrated by this model is to earn more market share while staying profitable. This means entities may lower prices to earn more customers, but they must keep prices above marginal cost in order to avoid a loss.
The Bertrand competition model only considers that entities will compete based on price. It does not take into consideration elements beyond pricing that may be valued by an entity such as customer loyalty, longevity, and influence. Bertrand competition also does not effectively measure what other elements beside price would motivate a potential customer such as convenience.
This model tends to be a more effective measure of a duopoly as this means that both entities have the capacity to capture and serve an entire market. When there are more entities involved, it becomes increasingly less likely that any one organization could handle market domination. For this reason, the success of the model depends heavily on the capabilities of the entities involved.
The Bertrand competition model is frequently used as an exercise in marketing curriculum. Its mathematical equations can be computed by hand or with software which can help to increase comprehension by graphing the data for each entity. There are websites which perform this function as well.