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Price Competition or Tacit Collusion

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  • Makoto Yano

    ()
    (Institute of Economic Research, Kyoto University)

  • Takashi Komatsubara

    ()
    (Institute of Economic Research, Kyoto University)

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    Abstract

    Every 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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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP807.pdf
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    Bibliographic Info

    Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 807.

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    Length: 33pages
    Date of creation: Jan 2012
    Date of revision:
    Handle: RePEc:kyo:wpaper:807

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    Keywords: Keywords: Price Competition; Price Leader; Market Organization Game;

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    1. Rabah Amir & Anna Stepanova, 2000. "Second-Mover Advantage and Price Leadership in Bertrand Duopoly," CIE Discussion Papers, University of Copenhagen. Department of Economics. Centre for Industrial Economics 2000-10, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
    2. Chaudhuri, Prabal Ray, 1996. "The contestable outcome as a Bertrand equilibrium," Economics Letters, Elsevier, Elsevier, vol. 50(2), pages 237-242, February.
    3. Dastidar, Krishnendu Ghosh, 1997. "Comparing Cournot and Bertrand in a Homogeneous Product Market," Journal of Economic Theory, Elsevier, Elsevier, vol. 75(1), pages 205-212, July.
    4. Dastidar, Krishnendu Ghosh, 1995. "On the Existence of Pure Strategy Bertrand Equilibrium," Economic Theory, Springer, Springer, vol. 5(1), pages 19-32, January.
    5. Novshek, William & Chowdhury, Prabal Roy, 2003. "Bertrand equilibria with entry: limit results," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 21(6), pages 795-808, June.
    6. Wambach, Achim, 1999. "Bertrand competition under cost uncertainty," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 17(7), pages 941-951, October.
    7. Boccard, N. & Wauthy, X.Y., 2010. "Equilibrium vertical differentiation in a Bertrand model with capacity precommitment," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 28(3), pages 288-297, May.
    8. Prabal Roy Chowdhury, 2009. "Bertrand competition with non-rigid capacity constraints," Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers, Indian Statistical Institute, New Delhi, India 09-02, Indian Statistical Institute, New Delhi, India.
    9. Krishnendu Dastidar, 2001. "Collusive outcomes in price competition," Journal of Economics, Springer, Springer, vol. 73(1), pages 81-93, February.
    10. 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.
    11. Ishibashi, Ikuo, 2008. "Collusive price leadership with capacity constraints," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 26(3), pages 704-715, May.
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    Cited by:
    1. Tasnádi, Attila, 2012. "Endogenous Timing of Moves in Bertrand-Edgeworth Triopolies," MPRA Paper 47610, University Library of Munich, Germany.

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