Editing Edgeworth paradox (section)

== Edgeworth model ==
Edgeworth's model follows Bertrand's hypothesis, where each seller assumes that the price of its competitor, not its output, remains constant. Suppose there are two sellers, A and B, facing the same demand curve in the market. To explain Edgeworth's model, let us first assume that A is the only seller in the market. Follow the [[profit maximization]] rules of the monopolistic seller, and then let B enter the market. B assumes that A will not change its price because he is making the most profit. B sets the price slightly lower than A's price and can sell its total output. At this price, B occupies a large part of the A market.

On the other hand, the sales of Seller A have fallen. To regain the market, A sets the price slightly lower than B's price. And leads to price wars between sellers.

A price war takes the form of a price reduction and continues until the price reaches a specific price. At this price, both A and B can sell all their products. Therefore, this price can be expected to stable. However, according to Edgeworth, prices should be unstable.
The reason is simple. Once a specific price set in the market, the seller will discover an interesting fact. This means that every seller is aware that their competitors are selling all of their products and will not change the price. Every seller believes that price can be increased and a net profit can be obtained.

This understanding forms the basis of their actions and reactions. For example, let seller A take the initiative to increase its price by two times. Assuming that A maintains his price, B will find that if he raises the price to a level slightly less than two times, B can sell all his products at a higher price and obtain greater profits. Therefore, B increased the price according to the plan.

Now it's A's turn to understand the situation and react. A finds that his price is higher than that of B, and his total sales have fallen. Therefore, assuming B retains its price, A reduces its price slightly lower than B's price.

Therefore, the price war between A and B starts again. This process will continue indefinitely, and the price will continue to move up and down between 1 and 2 times. Obviously, according to Edgeworth's duopoly model, since price and output are never determined, the equilibrium is unstable and uncertain.<br><ref>{{cite web |last1=Kumar |first1=Manoj |title=4 Types of Duopoly Models (With Diagram) |url=https://www.economicsdiscussion.net/duopoly/4-types-of-duopoly-models-with-diagram/7364 |website=Economics Discussion |date=8 May 2015}}</ref>

The Edgeworth model shows that the oligopoly price fluctuates between the [[perfect competition]] market and the perfect [[monopoly]], and there is no stable equilibrium.<ref>{{cite journal |last1=Xavier |first1=Vives |title=Edgeworth and modern oligopoly theory |journal=European Economic Review |date=1 April 1993 |volume=37 |issue=2–3 |pages=463–476 |doi=10.1016/0014-2921(93)90035-9}}</ref>

Unlike the Bertrand paradox, the situation of both companies charging zero-profit prices is not an equilibrium, since either company can raise its price and generate profits.  Nor is the situation where one company charges less than the other an equilibrium, since the lower price company can profitably raise its price towards the higher price company's price.  Nor is the situation where both companies charge the same positive-profit price, since either company can then lower its price marginally and profitably capture more of the market.<ref>{{cite book|title=Public Finance |author= Carl Sumner Shoup|year=2005|publisher=Aldine Transaction|isbn=0-202-30785-9|url= https://books.google.com/books?id=N_JHg2A2uw0C&dq=%22Edgeworth+paradox%22&pg=PA155}}</ref>