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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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Author Info
Jan Boone

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

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Find related papers by JEL classification:
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
L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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