Introduction
Oligopoly is one of the most common types of markets in modern economics. The Bertrand model was chosen when choosing an oligopoly model to study, as it represents a particular interest in practical applications. The Bertrand model describes a situation where multiple firms compete by setting product prices (Puu & Tramontana, 2019). In this model, firms prefer to lower costs to increase their market share, which can ultimately lead to reduced profits for all players in the market.
Applying the Bertrand Model to Personal Experience
Personal experience was chosen to practice the concept of the Bertrand model. I worked in the marketing department of a large international company that sold household appliances. Our company competed in the market with several other major manufacturers, and we often faced the challenge of pricing our products. Once, the company launched a large-scale campaign to reduce prices for all our products. The goal was to attract more consumers and increase our market share.
However, other companies have also begun to lower product costs to compete with us. This resulted in a significant drop in the prices of our products in the market, and our profits decreased. In this case, the reflection of decision theory in the Bertrand model is obvious. Our company decided to lower prices for our products, which became a strategic move in the conditions of Bertrand’s oligopoly. However, this decision led to a reaction from competitors who also lowered product prices. Ultimately, prices in the market fell, leading to reduced profits for all players.
Companies can use strategies to avoid such situations in the Bertrand oligopoly, such as product differentiation or setting minimum product prices. These strategies help companies maintain their market share and only allow competitors to lower costs to a level that will be disadvantageous for all players. Another approach companies can employ in the Bertrand oligopoly is to form a cartel, where firms agree to cooperate in setting prices and production levels (Puu & Tramontana, 2019).
This allows them to act as a monopoly and maximize profits, but it also requires high trust and coordination among the members. Another option is to focus on non-price competition, such as advertising or improving product quality, to differentiate themselves from competitors and create a loyal customer base. The Bertrand model highlights the importance of strategic decision-making in oligopolistic markets and different strategies’ potential benefits and pitfalls.
In Bertrand’s model, it is also essential to consider the market structure. If there are many firms in the market, the price decrease will be less significant since each firm has a small market share. However, if there are only a few significant players in the market, a price decline for one company can seriously affect the profits of all players. Decision theory also plays a vital role in Bertrand’s model. Each company must decide what price to set for its product, considering competitors’ actions and predicting how prices will change.
Conclusion
Bertrand’s oligopoly model is essential for analyzing markets where several significant players operate. Companies participating in such an oligopoly must consider not only their interests but also the actions of competitors. Only then can strategies be developed that will allow companies to maintain their market share and profitability. Using Bertrand’s model in my personal experience has helped me better understand the characteristics of oligopoly and the principles of decision-making in conditions of tough competition. This knowledge helped me develop effective marketing strategies for my company and achieve success in the market.
Reference
Puu, T., & Tramontana, F. (2019). Can Bertrand and Cournot oligopolies be combined? Chaos, Solitons & Fractals, 125, 97-107.