Journal Article

No. 2014-34 | October 27, 2014
Relative Profit Maximization and Bertrand Equilibrium with Convex Cost Functions PDF Icon

Abstract

This study derives pure strategy Bertrand equilibria in a duopoly in which two firms produce a homogeneous good with convex cost functions and seek to maximize the weighted sum of their absolute and relative profits. The study shows that there exists a range of equilibrium prices in duopolistic equilibria. This range of equilibrium prices is narrower and lower than the range of equilibrium prices in duopolistic equilibria under pure absolute profit maximization. Moreover, the larger the weight on the relative profit, the narrower and lower the range of equilibrium prices. In this sense, relative profit maximization is more aggressive than absolute profit maximization.

JEL Classification

D43 L13

Citation

Atsuhiro Satoh and Yasuhito Tanaka (2014). Relative Profit Maximization and Bertrand Equilibrium with Convex Cost Functions. Economics: The Open-Access, Open-Assessment E-Journal, 8 (2014-34): 1—15. http://dx.doi.org/10.5018/economics-ejournal.ja.2014-34

Assessment

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