Bertrand Oligopoly: This section presents Bertrand competition, or competition in which price is the strategic variable.  In this framework the nature of the goods is of utmost importance.  In cases where the products are identical, the result is an outcome in which price equals marginal cost (MC) just like in perfect competition.  When products are differentiated in some way, prices exceed MC.  Furthermore, the amount of product differentiation and the difference between price and MC are positively related.

 

This illustrates the second way in which a market can be competitive, and it is quite different from the results under Cournot competition.  In the Cournot model it is an increase in the number of firms that leads to more vigorous competition.  In the Bertrand model it is the degree of product differentiation.  As goods become more homogeneous, the market becomes more competitive, even with only a small number of firms.  This is an important point to emphasize because it suggests multiple mechanisms that can impact the degree of competition in the market.