Review of Behavioral Economics > Vol 4 > Issue 1

A New Approach to Modeling Bertrand Duopoly

Tönu Puu, Umeå University, Sweden,
Suggested Citation
Tönu Puu (2017), "A New Approach to Modeling Bertrand Duopoly", Review of Behavioral Economics: Vol. 4: No. 1, pp 51-67.

Publication Date: 11 Apr 2017
© 2017 T. Puu
JEL Codes: C63D11D21L13
Bertrand oligopolyLancaster’s new demandProduct designComplex dynamics


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In this article:
1. Introduction 
2. A Solution: Lancaster 
3. Duopoly 
4. Reaction Functions 
5. Numerical Results 
6. Conclusion 


Bertrand oligopoly needs global demand functions which apply to close substitutes. This is a problem, because economic theory never supplied anything but local definitions for substitutes. Lancaster’s “new theory of demand” is therefore invoked to supply one. In its format one can also quantify closeness of substitutes and incorporate optimisation of design. The present study focuses the pure price dynamics for Bertrand oligopoly when the design of the competing products is given, though quantified through Lancaster’s approach. Resulting is some complex dynamics, including high periodicity and chaos.