Bertrand Paradox in Circular City Model: Transportation Cost and Competitive Equilibrium

The Bertrand paradox describes a situation where two firms competing in a market set prices. In a circular city model, the market is represented as a circle with firms located at different points. The transportation cost parameter, 't', reflects the cost of moving goods between points on this circle.

When 't=0', transportation cost is zero, allowing firms to easily transport goods without incurring any cost. This leads to both firms setting their prices at the marginal cost, which is zero. The outcome is a perfectly competitive market where both firms charge the same price and share the market equally.

However, when 't>0', transportation cost becomes a factor affecting pricing decisions. Firms must consider the cost of transporting goods to different points on the circle, impacting their pricing strategies. This makes the market less than perfectly competitive, and the Bertrand paradox no longer applies.

In conclusion, the Bertrand paradox is applicable to the circular city model only when 't=0' because this is the sole scenario where the market exhibits perfect competition, allowing firms to set prices at their marginal cost.