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Bertrand Oligopoly with Heterogeneous Consumers

P. 648-655.

The present paper develops a model of Bertrand oligopoly accounting for consumers’ heterogeneity in tastes and incomes. The model obtains a closed-form solution for a short-run symmetric price equilibrium and shows how the market outcome depends on the joint distribution of consumers’ tastes and personal incomes. Particularly, the model demonstrates that the sign of the correlation coefficient between the two univariate distributions is a key factor in the market response to a shock in the distribution parameters. Proposed approach is capable to explain variability of mark-ups at a given number of firms, which is observed empirically, but cannot be explained by traditional models of oligopolistic competition with CES utility function. Unlike the more conventional models of oligopoly, our set-up shows that mark-ups may vary along with the moments of the joint tastes-income distribution. Particularly, an increase in income may exert ambiguous influence upon markups depending on the sign of the correlation coefficient between tastes and incomes of the consumers.