In the model of Bertrand Competition, it been found that firms would compete, driving price down to marginal cost so that firms make zero economic profits.  This means there are firms essentially behaving as if they are perfectly competitive, even with just two firms. Despite this very clear prediction, evidence of this outcome is not ofter seen, even in markets where it is believed that firms are indeed competing via price.  Why might this be? For instance, what assumptions are made about costs of firms and how might things play out if those assumptions fail? What are some things firms could do in this situation to prevent prices from dropping as low as marginal cost, even if the assumptions on costs are true?

Microeconomic Theory
12th Edition
ISBN:9781337517942
Author:NICHOLSON
Publisher:NICHOLSON
Chapter15: Imperfect Competition
Section: Chapter Questions
Problem 15.4P
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In the model of Bertrand Competition, it been found that firms would compete, driving price down to marginal cost so that firms make zero economic profits.  This means there are firms essentially behaving as if they are perfectly competitive, even with just two firms. Despite this very clear prediction, evidence of this outcome is not ofter seen, even in markets where it is believed that firms are indeed competing via price.  Why might this be? For instance, what assumptions are made about costs of firms and how might things play out if those assumptions fail? What are some things firms could do in this situation to prevent prices from dropping as low as marginal cost, even if the assumptions on costs are true?

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