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Question: a what is the bertrand trap faced by firms competing...

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(a) What is the Bertrand trap faced by firms competing on setting prices? Explain in a few sentences.

Now let us consider the current trend of online sales. E-commerce (selling products in an online marketplace) represents an increasing fraction of economic transactions in many different industries compared to physical brick-and-mortar stores that sold products in the past.

(b) Does e-commerce create a Bertrand trap? (Hint: Discuss in terms of how online shopping affects (i) product differentiation and (ii) capacity constraints of sellers.)

(c) How can e-commerce firms possibly avoid the trap? (Hint: what strategies can help an online firm to distinguish itself from its competitor? You can use examples from the real world to support your answer.)

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