Thursday, September 30, 2010

Price Competition

Walmart and Amazon have been recently competing vigourously on the prices they charge customers and each other, which has lead to what some call a price war. This is an excellent example of the economic implications on price when firms compete on prices (like Amazon and Walmart) and also compete in product markets that are nearly homogeneous or perfectly homogeneous (i.e. a book bought from each is exactly the same). The only way they are slightly different is in the purchase - on-line or at a retail store. The Bertrand homogenous oligopoly model does a good job of showing how price competitive firms end up pricing, and Amazon and Walmart seem to be fitting this pattern for a variety of products that each sells.

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