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List Pricing And Pure Strategy Outcomes In A Bertrand-Edgeworth Duopoly

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  • Antón García Díaz
  • Praveen Kujal

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Abstract

Non-existence of a pure strategy equilibrium in a Bertrand-Edgeworth duopoly model is analyzed. The standard model is modified to include a list pricing stage and a subsequent price discounting stage. Both firms first simultaneously choose a maximum list price and then decide to lower the price, or not, in a subsequent discounting stage. List pricing works as a credible commitment device that induces the pure strategy outcome. It is shown that for a general class of rationing rules there exists a sub-game perfect equilibrium that involves both firms playing pure strategies. This equilibrium payoff dominates any other sub-game perfect equilibrium of the game. Further unlike the dominant firm interpretation of a price leader, we show that the small firm may have incentives to commit to a low price and in this sense assume the role of a leader.

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Bibliographic Info

Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we034918.

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Date of creation: Oct 2003
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Handle: RePEc:cte:werepe:we034918

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  1. Damme, E.E.C. van & Hurkens, J.P.M., 1996. "Commitment robust equilibria and endogenous timing," Open Access publications from Tilburg University urn:nbn:nl:ui:12-73412, Tilburg University.
  2. Raymond Deneckere & Dan Kovenock, 1988. "Price Leadership," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 773, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Levitan, Richard & Shubik, Martin, 1972. "Price Duopoly and Capacity Constraints," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(1), pages 111-22, February.
  4. Sorgard, L., 1995. "Judo Economics Reconsidered: Capacity Limitation, Entry and Collusion," Papers, Norwegian School of Economics and Business Administration- 18/95, Norwegian School of Economics and Business Administration-.
  5. Borgers, Tilman, 1992. "Iterated Elimination of Dominated Strategies in a Bertrand-Edgeworth Model," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 59(1), pages 163-76, January.
  6. Allen, Beth & Hellwig, Martin, 1986. "Bertrand-Edgeworth Oligopoly in Large Markets," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 53(2), pages 175-204, April.
  7. Hamilton, J.H. & Slutsky, S.M., 1988. "Endogenous Timing In Duopoly Games: Stackelberg Or Cournot Equilibria," Papers, Florida - College of Business Administration 88-4, Florida - College of Business Administration.
  8. Maskin, Eric, 1986. "The Existence of Equilibrium with Price-Setting Firms," American Economic Review, American Economic Association, American Economic Association, vol. 76(2), pages 382-86, May.
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  10. Dasgupta, Partha & Maskin, Eric, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 53(1), pages 1-26, January.
  11. Dixon, Huw, 1990. "Bertrand-Edgeworth Equilibria when Firms Avoid Turning Customers Away," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 39(2), pages 131-46, December.
  12. Vives, Xavier, 1986. "Rationing rules and Bertrand-Edgeworth equilibria in large markets," Economics Letters, Elsevier, Elsevier, vol. 21(2), pages 113-116.
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Cited by:
  1. Roberts Waddle, 2005. "Strategic Profit Sharing Between Firms: The Bertrand Model," Economics Working Papers we050902, Universidad Carlos III, Departamento de Economía.

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