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Quality Uncertainty as Resolution of the Bertrand Paradox
Author(s) -
Tasnádi Attila,
Smith Trenton G.,
Hanks Andrew S.
Publication year - 2012
Publication title -
pacific economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.34
H-Index - 33
eISSN - 1468-0106
pISSN - 1361-374X
DOI - 10.1111/1468-0106.12005
Subject(s) - economics , bertrand competition , product differentiation , duopoly , product (mathematics) , preference , microeconomics , ex ante , homogeneous , quality (philosophy) , marginal cost , mathematical economics , econometrics , oligopoly , mathematics , cournot competition , philosophy , geometry , epistemology , combinatorics , macroeconomics
It is well‐known that product differentiation eliminates the Bertrand paradox (i.e. marginal cost pricing under duopoly). While differentiation is often justified with reference to the consumer's ‘preference for variety’, the conditions under which such a preference is likely to arise are rarely considered. We investigate this question in a setting in which uncertainty about product quality can endogenously generate either convex or non‐convex preferences. We show that even when two goods are ex ante homogeneous, quality uncertainty can eliminate the Bertrand paradox.