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Alternating-move Hotelling with Demand Shocks

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  • Leufkens, Kasper
  • Peeters, Ronald

    (METEOR)

Abstract

In this paper an infinite-horizon alternating-move Hotelling model in which consumers are uniformly distributed over the market is considered. In a Markov perfect equilibrium, a seller’s move in any period depends on the price the other seller is committed to. The analytic solution is given and the unique linear Markov perfect equilibrium is computed for different values of the discount factor. The base model is then extended by the introduction of exogenous demand shocks which makes finding an analytical solution using the conventional analysis impossible. For this extended model the margin in which long-run prices fluctuate is determined for different values of the shock probability. It is found that the prices set in the high demand state are always lower than in the low demand state. Thus, our findings would support a notion of counter cyclical pricing with respect to the state of demand.

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Bibliographic Info

Paper provided by Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) in its series Research Memorandum with number 039.

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Date of creation: 2006
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Handle: RePEc:unm:umamet:2006039

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Keywords: Industrial Organization;

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  1. Eaton, Jonathan & Engers, Maxim, 1990. "Intertemporal Price Competition," Econometrica, Econometric Society, Econometric Society, vol. 58(3), pages 637-59, May.
  2. Lau, Sau-Him Paul, 2002. "Solution of Multi-player Linear-Quadratic Alternating-Move Games and Its Application to the Timing Pattern of Wage Adjustment," Computational Economics, Society for Computational Economics, Society for Computational Economics, vol. 19(3), pages 341-57, June.
  3. Herings, P. Jean-Jacques & Peeters, Ronald J. A. P., 2004. "Stationary equilibria in stochastic games: structure, selection, and computation," Journal of Economic Theory, Elsevier, Elsevier, vol. 118(1), pages 32-60, September.
  4. Eckert, Andrew, 2004. "An alternating-move price-setting duopoly model with stochastic costs," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 22(7), pages 997-1015, September.
  5. Michael Baye & Shyh-Fang Ueng, 1999. "Commitment and price competition in a dynamic differentiated-product duopoly," Journal of Economics, Springer, Springer, vol. 69(1), pages 41-52, February.
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