Price Competition or Tacit Collusion
AbstractEvery now and then, we observe a fierce price war in a real world market, through which competing firms end up with a Bertrand-like price competition equilibrium. Despite this, very little has been known in the existing literature as to why a price competition market is formed. We address this question in the context of a choice between engaging in price competition and holding a price leader. Focusing on a duopoly market, we demonstrate that if supply is tight relative to demand, and if the cost differential between firms is reasonably large, a price competition market is formed non-cooperatively.
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Bibliographic InfoPaper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 807.
Date of creation: Jan 2012
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Keywords: Price Competition; Price Leader; Market Organization Game;
Find related papers by JEL classification:
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-01-18 (All new papers)
- NEP-BEC-2012-01-18 (Business Economics)
- NEP-COM-2012-01-18 (Industrial Competition)
- NEP-IND-2012-01-18 (Industrial Organization)
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