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Reciprocity, inequity-aversion, and oligopolistic competition

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Author Info
Santos-Pinto, Luís

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Abstract

This paper extends the Cournot and Bertrand models of strategic interaction between firms by assuming that managers are not only profit maximizers, but also have preferences for reciprocity or are averse to inequity. A reciprocal manager responds to unkind behavior of rivals with unkind actions, while at the same time, it responds to kind behavior of rivals with kind actions. An inequity averse manager likes to reduce the difference between own profits and the rivals’ profits. The paper finds that if firms with reciprocal managers compete à la Cournot, then they may be able to sustain “collusive” outcomes under a constructive reciprocity equilibrium. By contrast, Stackelberg warfare may emerge under a destructive reciprocity equilibrium. If there is Cournot competition between firms and their managers are averse to advantageous (disadvantageous) inequity, then firms are better (worse) off than if managers only care about maximizing profits. If firms compete à la Bertrand, then only under very restrictive conditions will managers’ preferences for reciprocity or inequity aversion have an impact on equilibrium outcomes.

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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 3143.

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Date of creation: 17 May 2006
Date of revision: 14 Apr 2007
Handle: RePEc:pra:mprapa:3143

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Related research
Keywords: Reciprocity Inequity Aversion Cournot Bertrand.

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Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Santos-Pinto, Luís, 2006. "Making Sense of the Experimental Evidence on Endogenous Timing in Duopoly Markets," MPRA Paper 3142, University Library of Munich, Germany, revised 27 Apr 2007. [Downloadable!]
  2. Dastidar, Krishnendu Ghosh, 1995. "On the Existence of Pure Strategy Bertrand Equilibrium," Economic Theory, Springer, vol. 5(1), pages 19-32, January.
  3. Pinto, Luis Santos, 2007. "Collusion and Reciprocity in Infinitely Repeated Games," FEUNL Working Paper Series wp512, Universidade Nova de Lisboa, Faculdade de Economia. [Downloadable!]
  4. Ernst Fehr & Klaus M. Schmidt, 1999. "A Theory Of Fairness, Competition, And Cooperation," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 817-868, August. [Downloadable!] (restricted)
    Other versions:
  5. William Neilson, 2006. "Axiomatic reference-dependence in behavior toward others and toward risk," Economic Theory, Springer, vol. 28(3), pages 681-692, 08. [Downloadable!] (restricted)
  6. Dominique Demougin & Claude Fluet, 2003. "Inequity Aversion in Tournaments," Cahiers de recherche 0322, CIRPEE. [Downloadable!]
    Other versions:
  7. Prasnikar, Vesna & Roth, Alvin E, 1992. "Considerations of Fairness and Strategy: Experimental Data from Sequential Games," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 865-88, August. [Downloadable!] (restricted)
  8. Huck, Steffen & Normann, Hans-Theo & Oechssler, Jorg, 2004. "Two are few and four are many: number effects in experimental oligopolies," Journal of Economic Behavior & Organization, Elsevier, vol. 53(4), pages 435-446, April. [Downloadable!] (restricted)
    Other versions:
  9. Joel Sobel, 2005. "Interdependent Preferences and Reciprocity," Journal of Economic Literature, American Economic Association, vol. 43(2), pages 392-436, June. [Downloadable!] (restricted)
  10. Florian Englmaier & Achim Wambach, 2005. "Optimal Incentive Contracts under Inequity Aversion," IZA Discussion Papers 1643, Institute for the Study of Labor (IZA). [Downloadable!]
  11. Uzi Segal & Joel Sobel, 1999. "Tit for Tat: Foundations of Preferences for Reciprocity in Strategic Settings," UWO Department of Economics Working Papers 9905, University of Western Ontario, Department of Economics. [Downloadable!]
    Other versions:
  12. Gary E. Bolton & Axel Ockenfels, 2000. "ERC: A Theory of Equity, Reciprocity, and Competition," American Economic Review, American Economic Association, vol. 90(1), pages 166-193, March. [Downloadable!] (restricted)
  13. Rabin, Matthew, 1993. "Incorporating Fairness into Game Theory and Economics," American Economic Review, American Economic Association, vol. 83(5), pages 1281-1302, December. [Downloadable!] (restricted)
  14. Nabil Al-Najjar & Sandeep Baliga & David Besanko, 2008. "Market forces meet behavioral biases: cost misallocation and irrational pricing," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 214-237. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Santos-Pinto, Luís, 2006. "Making Sense of the Experimental Evidence on Endogenous Timing in Duopoly Markets," MPRA Paper 3142, University Library of Munich, Germany, revised 27 Apr 2007. [Downloadable!]
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