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Edgeworth Cycles and Focal Prices: Computational Dynamic Markov Equilibria

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  • Noel, Michael D.
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    Abstract

    Motivated by the discovery of apparent Edgeworth Cycles in many retail gasoline markets, this paper extends the Maskin & Tirole [1988] theory Edgeworth Cycles to a wide range of more complicated and realistic settings. Taking a computational approach to search for Markov Perfect Equilibria, I examine models involving duopoly and triopoly, differentiation, capacity constraints, and different sharing rules, discount factors and initial beliefs about price leading behavior. I find Edgeworth Cycles equilibrium in many scenarios outside the homogenous-good Bertrand mold. Cycle characteristics and average markups depend on the scenario.

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    Bibliographic Info

    Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt59t3g818.

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    Date of creation: 01 Sep 2004
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    Handle: RePEc:cdl:ucsdec:qt59t3g818

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    Keywords: D43; L11; L13;

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    1. Reynolds, Stanley S. & Wilson, Bart J., 2000. "Bertrand-Edgeworth Competition, Demand Uncertainty, and Asymmetric Outcomes," Journal of Economic Theory, Elsevier, vol. 92(1), pages 122-141, May.
    2. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June.
    3. Benoit, Jean-Pierre & Krishna, Vijay, 1987. "Dynamic Duopoly: Prices and Quantities," Review of Economic Studies, Wiley Blackwell, vol. 54(1), pages 23-35, January.
    4. Doraszelski, Ulrich & Pakes, Ariel, 2007. "A Framework for Applied Dynamic Analysis in IO," Handbook of Industrial Organization, Elsevier.
    5. Kovenock, D. & Roy, S., 1995. "Dynamic Capacity Choice in a Bertrand-Edgeworth Framework," Purdue University Economics Working Papers 1080, Purdue University, Department of Economics.
    6. Andrew Eckert, 2002. "Retail price cycles and response asymmetry," Canadian Journal of Economics, Canadian Economics Association, vol. 35(1), pages 52-77, February.
    7. Godby, Rob & Lintner, Anastasia M. & Stengos, Thanasis & Wandschneider, Bo, 2000. "Testing for asymmetric pricing in the Canadian retail gasoline market," Energy Economics, Elsevier, vol. 22(3), pages 349-368, June.
    8. Slade, Margaret E, 1987. "Interfirm Rivalry in a Repeated Game: An Empirical Test of Tacit Collusion," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 499-516, June.
    9. Eric Maskin & Jean Tirole, 1997. "Markov Perfect Equilibrium, I: Observable Actions," Harvard Institute of Economic Research Working Papers 1799, Harvard - Institute of Economic Research.
    10. Slade, Margaret E, 1992. "Vancouver's Gasoline-Price Wars: An Empirical Exercise in Uncovering Supergame Strategies," Review of Economic Studies, Wiley Blackwell, vol. 59(2), pages 257-76, April.
    11. Brock, William A & Scheinkman, Jose A, 1985. "Price Setting Supergames with Capacity Constraints," Review of Economic Studies, Wiley Blackwell, vol. 52(3), pages 371-82, July.
    12. Brown-Kruse, Jamie, et al, 1994. "Bertrand-Edgeworth Competition in Experimental Markets," Econometrica, Econometric Society, vol. 62(2), pages 343-72, March.
    13. Eckert, Andrew, 2003. "Retail price cycles and the presence of small firms," International Journal of Industrial Organization, Elsevier, vol. 21(2), pages 151-170, February.
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