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A theoretical foundation for the undercut-proof equilibrium

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  • Byford, Martin C.

Abstract

This paper develops a theoretical foundation for the undercut-proof equilibrium (see Shy, 1996, 2002; Morgan and Shy, 2015). In a general spatial setting, the set of undercut-proof prices is equivalent to the core of a non-transferable utility coalitional-game, played on the set of outcomes that are feasible in Bertrand competition. The result depends critically on two conditions: First, firms must have unlimited capacity and constant marginal costs. Second, the goods produced by firms must only be differentiated by the spatial characteristics of the market. An application to network markets shows how the undercut-proof equilibrium can be used to describe stable price dispersion and persistent performance differences.

Suggested Citation

  • Byford, Martin C., 2015. "A theoretical foundation for the undercut-proof equilibrium," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 209-220.
    • Handle: RePEc:eee:jetheo:v:159:y:2015:i:pa:p:209-220
    DOI: 10.1016/j.jet.2015.06.001
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    Cited by:

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    More about this item

    Keywords

    Bertrand–Nash equilibrium; Undercut-proof equilibrium; Non-transferable utility coalitional games; Core equivalence; Network markets;
    All these keywords.

    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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