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The Noisy Duopolist

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  • Spector David

    () (Cepremap)

Abstract

This paper provides an explanation for noisy pricing based on the strategic interaction of two firms competing in prices. When a firm adds noise to its prices, undercutting it becomes harder. Therefore, noisy pricing allows a firm to either exclude a competitor while charging supracompetitive prices, or to soften competition and have both firms earn supracompetitive profits. Such behavior leads to prices lying between competitive and monopolistic levels, and harms consumers and social welfare. It occurs in equilibrium if firms set prices sequentially, and in some equilibria of a repeated game of simultaneous price-setting if one firm is patient.

Suggested Citation

  • Spector David, 2002. "The Noisy Duopolist," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 2(1), pages 1-19, August.
  • Handle: RePEc:bpj:bejtec:v:contributions.2:y:2002:i:1:n:4
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    Cited by:

    1. Xavier Gabaix & David Laibson & Hongyi Li, 2005. "Extreme Value Theory and the Effects of Competition on Profits," Levine's Bibliography 784828000000000656, UCLA Department of Economics.
    2. Kaminski, Bogumil & Latek, Maciej, 2012. "A Simple Model of Bertrand Duopoly with Noisy Prices," MPRA Paper 41333, University Library of Munich, Germany.

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