Glossary of competition terms

This Glossary was prepared by DG COMP and the OECD for non-competition specialists. Each term is enriched with references of national case laws from the e-Competitions Bulletin. (© European Union - © OECD)

Bertrand (Nash) Equilibrium

In a Bertrand model of oligopoly, firms independently choose prices (not quantities) in order to maximize profits. This is accomplished by assuming that rivals’ prices are taken as given. The resulting equilibrium is a Nash equilibrium in prices, referred to as a Bertrand (Nash) equilibrium.

When the industry is symmetric, i.e., comprising firms of equal size and identical costs, and the costs are constant and the product homogenous, the Bertrand equilibrium is such that each firm sets price equal to marginal cost, and the outcome is Pareto efficient. This result holds regardless of the number of firms and stands in contrast to the Cournot equilibrium where the deviation from Pareto efficiency increases as the number of firms decreases.

However, when products are differentiated even the Bertrand model results in prices which exceed marginal cost, and the difference increases as products become more differentiated. (...)