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Duopoly Competition, Escape Dynamics and Non-cooperative Collusion

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  • Batlome Janjgava
  • Sergey Slobodyan

Abstract

In this paper, we study an imperfect monitoring model of duopoly under similar settings as in Green and Porter (1984), but here firms do not know the demand parameters and learn about them over time though the price signals. We investigate how a deviation from rational expectations affects the decision making process and what kind of behavior is sustainable in equilibrium. We find that the more common information firms analyze to update their beliefs, the more room is for implicit coordination. This might propagate escapes from the Cournot- Nash Equilibrium and the formation of cartels without explicit cooperative motives. In contrast to Green and Porter (1984), our results show that in a model with learning, breakdown of a cartel happens even without a demand shock. Moreover, in this model an expected price serves as an endogenous price threshold, which triggers a price war. Finally, by investigating the durations of the cooperative and price war phases, we find that in industries with a higher Nash equilibrium output and a lower volatility of firm-specific shocks, it is easier to maintain a cartel and harder to break it down.

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Bibliographic Info

Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp445.

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Date of creation: Sep 2011
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Handle: RePEc:cer:papers:wp445

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Related research

Keywords: beliefs; escape dynamics; implicit collusion; self-confirming equilibrium; learning;

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References

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  1. Yuliy Sannikov & Andrzej Skrzypacz, 2004. "Impossibility of Collusion under Imperfect Monitoring with Flexible Production," 2004 Meeting Papers 418, Society for Economic Dynamics.
  2. Mirman Leonard J. & Samuelson Larry & Schlee Edward E., 1994. "Strategic Information Manipulation in Duopolies," Journal of Economic Theory, Elsevier, vol. 62(2), pages 363-384, April.
  3. repec:att:wimass:9206 is not listed on IDEAS
  4. repec:cep:stitep:333 is not listed on IDEAS
  5. Mirman,Leonard & Samuelson,Larry & Urbano,Amparo, . "Duopoly signal jamming," Discussion Paper Serie B 199, University of Bonn, Germany.
  6. Ellison, Martin & Scott, Andrew, 2013. "Learning and price volatility in duopoly models of resource depletion," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 806-820.
  7. Abreu, Dilip & Pearce, David & Stacchetti, Ennio, 1986. "Optimal cartel equilibria with imperfect monitoring," Journal of Economic Theory, Elsevier, vol. 39(1), pages 251-269, June.
  8. Balvers, Ronald J & Cosimano, Thomas F, 1990. "Actively Learning about Demand and the Dynamics of Price Adjustment," Economic Journal, Royal Economic Society, vol. 100(402), pages 882-98, September.
  9. Godfrey Keller & Sven Rady, 1998. "Optimal Experimentation in a Changing Environment," Game Theory and Information 9801001, EconWPA.
  10. Dilip Abreu & David Pearce & Ennio Stacchetti, 1997. "Optimal Cartel Equilibria with Imperfect monitoring," Levine's Working Paper Archive 632, David K. Levine.
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Cited by:
  1. Batlome Janjgava, 2013. "Free Entry and Social Efficiency under Unknown Demand Parameters," CERGE-EI Working Papers wp495, The Center for Economic Research and Graduate Education - Economic Institute, Prague.

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