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’Be nice, unless it pays to fight’: A New Theory of Price Determination with Implications for Competition Policy

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  • Jan Boone

Abstract

This paper introduces a simple extensive form pricing game where firms can react to each others’ price changes before the customers arrive. The Bertrand outcome is a Nash equilibrium outcome in this game, but it is not necessarily subgame perfect. The subgame perfect equilibrium outcome features the following comparative static properties. The more similar firms are, the higher the equilibrium price. Further, a new firm that enters the industry or an existing firm that becomes more efficient can raise the equilibrium price.

ZUSAMMENFASSUNG - (‘Sei nett, außer es zahlt sich aus zu kämpfen’: Eine neue Theorie der Preisbestimmung und ihre Bedeutung für die Wettbewerbspolitik)
In diesem Beitrag wird die extensive Form eines einfachen Preisspiels vorgestellt, in dem jedes Unternehmen auf Preisänderungen des anderen reagieren kann, bevor die Kunden eintreffen. Das Bertrand-Ergebnis dieses Spiels ist ein Nash-Gleichgewicht, aber es ist nicht notwendigerweise Teilspielperfekt. Das teilspielperfekte Gleichgewicht hat die folgenden komparativ-statischen Eigenschaften. Je ähnlicher die Firmen sind, desto höher ist der Gleichgewichtspreis. Darüber hinaus kann, wenn eine neue Firma in den Markt eintritt oder eine bestehende effizienter wird, der Gleichgewichtspreis steigen.

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Bibliographic Info

Paper provided by Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG) in its series CIG Working Papers with number FS IV 02-18.

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Length: 47 pages
Date of creation: Nov 2002
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Handle: RePEc:wzb:wzebiv:fsiv02-18

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Keywords: Intermediation; Bertrand paradox; price leadership; mergers; joint dominance; balance of power;

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References

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  1. Röller, Lars-Hendrik & Stennek, Johan & Verboven, Frank, 2000. "Efficiency Gains from Mergers," Working Paper Series 543, Research Institute of Industrial Economics.
  2. Stiglitz, Joseph E., 1989. "Imperfect information in the product market," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 13, pages 769-847 Elsevier.
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  4. Jeremy Bulow & Paul Klemperer, 1999. "Prices and the Winner's Curse," Game Theory and Information 9904003, EconWPA.
  5. Farrell, Joseph & Shapiro, Carl, 1988. "Horizontal Mergers: An Equilibrium Analysis," Department of Economics, Working Paper Series qt0tp305nx, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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  7. Salant, Stephen W & Switzer, Sheldon & Reynolds, Robert J, 1983. "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 185-99, May.
  8. Robson, Arthur J, 1983. "Existence of Consistent Conjectures: Comment," American Economic Review, American Economic Association, vol. 73(3), pages 454-56, June.
  9. McAfee, R Preston & Simons, Joseph J & Williams, Michael A, 1992. "Horizontal Mergers in Spatially Differentiated Noncooperative Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 40(4), pages 349-58, December.
  10. Rosenthal, Robert W, 1980. "A Model in Which an Increase in the Number of Sellers Leads to a Higher Price," Econometrica, Econometric Society, vol. 48(6), pages 1575-79, September.
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  12. Maskin, Eric & Tirole, Jean, 1988. "A Theory of Dynamic Oligopoly, II: Price Competition, Kinked Demand Curves, and Edgeworth Cycles," Econometrica, Econometric Society, vol. 56(3), pages 571-99, May.
  13. Abreu, Dilip, 1986. "Extremal equilibria of oligopolistic supergames," Journal of Economic Theory, Elsevier, vol. 39(1), pages 191-225, June.
  14. Klemperer, Paul D. & Meyer, Margaret A., 1988. "Consistent conjectures equilibria: A reformulation showing non-uniqueness," Economics Letters, Elsevier, vol. 27(2), pages 111-115.
  15. Bresnahan, Timothy F, 1983. "Existence of Consistent Conjectures: Reply," American Economic Review, American Economic Association, vol. 73(3), pages 457-58, June.
  16. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-77, November.
  17. Julio J. Rotemberg & Garth Saloner, 1984. "A Supergame-Theoretic Model of Business Cycles and Price Wars During Booms," Working papers 349, Massachusetts Institute of Technology (MIT), Department of Economics.
  18. Perry, Martin K & Porter, Robert H, 1985. "Oligopoly and the Incentive for Horizontal Merger," American Economic Review, American Economic Association, vol. 75(1), pages 219-27, March.
  19. Bresnahan, Timothy F, 1981. "Duopoly Models with Consistent Conjectures," American Economic Review, American Economic Association, vol. 71(5), pages 934-45, December.
  20. Grant, Simon & Quiggin, John, 1994. "Nash equilibrium with mark-up-pricing oligopolists," Economics Letters, Elsevier, vol. 45(2), pages 245-251, June.
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