Final answer:
The intersection of all firms' best response curves in a Bertrand model determines the market equilibrium prices. This equilibrium can lead to zero economic profits for the firms due to intense price competition, typically when average costs equal demand.
Step-by-step explanation:
In the context of a Bertrand model, when considering profit-maximizing strategies for firms, the intersection of all firms' best response curves indicates the market equilibrium.
Graphically, this point represents the price at which each firm chooses an output level such that its marginal revenue (MR) is equal to its marginal cost (MC).
In a perfectly competitive market, a single firm’s profit-maximizing choice is at the level of output where MR = MC.
However, in the Bertrand model, which typically assumes at least two firms producing a homogeneous product with perfect information, the competition focuses on price rather than quantity.
Each firm’s best response curve represents its optimal pricing strategy given the price set by the competing firm.
The intersection of these curves thus determines the equilibrium prices for the firms, which can ultimately result in zero economic profits in the long run due to 'cutthroat competition' if firms continue to undercut each other’s prices.
This phenomenon of reaching zero economic profits occurs when average cost is equal to demand at the equilibrium price.