Directed Search and the Bertrand Paradox

Athanasios Geromichalos

No 243, Working Papers from University of California, Davis, Department of Economics

Abstract: I study a directed search model of oligopolistic competition, extended to incorporate general capacity constraints, congestion effects, and pricing based on ex-post realized demand. I show that as long as any one of these ingredients is present, the Bertrand paradox will fail to hold. Hence, I argue that, despite the emphasis that has been placed by the literature on sellers? capacity constraints as a resolution to the paradox, the existence of such constraints is only a subcase of a general class of environments where the paradox fails. More precisely, Bertrand?s paradox will not arise whenever the buyers? expected utility from visiting a specific seller is decreasing in that seller?s realized demand.

Keywords: Directed Search; Bertrand Paradox; Capacity Constraints; Congestion Effects; State-contingent Pricing (search for similar items in EconPapers)
Pages: 23
Date: 2012-09-24
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