The approximation of competitive equilibria by Bertrand-Edgeworth equilibria in large markets (Q1123106)

The paper considers the Bertrand-Edgeworth model in which capacity constrained firms set prices non-cooperatively. For such models, mixed strategy equilibria are known to exist. Sequences of markets for a single homogeneous good with increasing number of firms defined by capacity constraints are considered. As the markets become `more competitive', firms are made uniformly smaller but demand and total capacity are unchanged. The main result shows that any competitive price, with the property that a slightly higher prices demand is less than aggregate capacity, forms the limit of a sequence of mixed strategy Bertrand- Edgeworth equilibria with a large but finite number of firms. In addition, any competitive price not included in the boundary of the set of prices at which capacity exceeds demand cannot be approximated by the above type of sequence. The approximation theorem does not require any regularity of the given competitive price nor does it require smoothness of the demand function.