Price Interventions in Bertrand Oligopoly with Costly Entry

Abstract

When firms set prices and face entry costs, efficiency in production and in entry are not simultaneously achieved, generating the possibility that regulatory interventions can lead to efficiency enhancements. We show through the Bertrand model that in markets with public entry and regular downward-sloping demand, if firms are symmetric and engage in symmetric behaviour in equilibrium, a low price floor, close to the marginal cost, can induce a Pareto improvement, leaving firms at least indifferent, while enhancing consumers’ surplus. The effect may leave a trace when entry costs are low. The optimal floor-ceiling combination fixes the price, equating the two.

Keywords: Sunk Costs of Entry, Price-Setting Firms, Bertrand Oligopoly, Price Interventions, Pareto Improvement

JEL Classification: D43, D61, L13, L51