Bertrand Price Undercutting: a Brief Classroom Demonstration

Acknowledgement: I appreciate the constructive comments of Andrew Austin and three anonymous referees for the Journal of Economic Education. Abstract I present a brief classroom demonstration illustrating Bertrand price undercutting. The classroom demonstration is appropriate for Micro Principles, and both intermediate and upper level undergraduate, as well as graduate classes in micro, Industrial Organization, and Game Theory. Abstrakt Článek popisuje jednoduchou demonstraci Bertrandovy cenové války (snižování cen v důsledku hospodářské soutěže), která může být provedena přímo ve třídě. Demonstrace je vhodná pro výuku mikroekonomických principů na středně pokročilé až pokročilé vysokoškolské úrovni, a pro výuku mikroekonomie, průmyslové organizace a teorie her na úrovni doktorandského studia. 1 A referee of the original manuscript suggested that the instructions were too suggestive and proposed an alternative formulation which, slightly modified, I have since repeatedly used: " You are one of [the number of students in class] sellers who has to state a price between 0 and 100 Czech Koruns (nonnegative integers only) in order to sell a homogenous good to [the number of students in class] potential buyers. The seller with the lowest price will capture the entire market and will receive [difference of his price and marginal costs] x [number of students in class] Czech Koruns. If there are ties for the lowest price then the buyers are split among those who tie. Those with a higher price will receive nothing. Marginal costs are zero, and fixed costs are zero. " This formulation, since it does not use the terms " Bertrand price undercutting " and " Bertrand competitor " , should also be used if an instructor prefers to do the experiment before lecturing on Cournot and Bertrand competition.