Bertrand Supertraps

We study oligopoly price competition between multiproduct firms, firms whose products interact in the profit function. Specifically, we focus on the impact of intra-firm product interactions on the level of equilibrium profits. This impact is divided into two effects: a direct effect and a strategic effect (i.e., through the competitors’ actions). We derive conditions such that the strategic effect more than outweighs the direct effect: a Bertrand supertrap. For example, an increase in the degree of economies of scope implies a positive direct effect (lower costs) but a negative direct effect (lower equilibrium profits). A variety of applications is considered, including learning curves, network effects, systems competition, bundling, switching costs, and others.