Bertrand Duopoly
The diagram shows the reaction function of a firm competing on price. When P2 (the price set by Firm 2) is less than marginal cost, Firm 1 prices at marginal cost (P1=MC). When Firm 2 prices above MC but below monopoly prices, Firm 1 prices just below Firm 2. When Firm 2 prices above monopoly price (PM), Firm 1 prices at monopoly level (P1=PM).
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