Why are firms sometimes unwilling to reduce costs? (Q601789)

The paper presents comparative statics results for a linear Bertrand (Bertrand-Shubik) oligopoly model with \(n\) goods and (potentially many) multiproduct firms wherein each firm's marginal cost of each product is fixed. It is shown that under assumption of existence of a unique and positive equilibrium the multiproduct firm may experience some ``strange'' behaviour: if the firm reduces marginal cost of a product by a sufficiently small (but well defined) amount then it is possible for the firm's profit to decrease. It is also shown that the anomaly is excluded if there are no multiproduct firms or there is monopoly or quantity competition among the firms (Cournot oligopoly). Explicit formulae for Bertrand/Cournot equilibrium with arbitrary partition of products among firms are derived. Mathematical methods used in the paper are some basic differential calculus and linear algebra methods.