IDEAS home Printed from https://ideas.repec.org/p/cer/papers/wp445.html
   My bibliography  Save this paper

Duopoly Competition, Escape Dynamics and Non-cooperative Collusion

Author

Listed:
  • Batlome Janjgava
  • Sergey Slobodyan

Abstract

In this paper, we study an imperfect monitoring model of duopoly under similar settings as in Green and Porter (1984), but here firms do not know the demand parameters and learn about them over time though the price signals. We investigate how a deviation from rational expectations affects the decision making process and what kind of behavior is sustainable in equilibrium. We find that the more common information firms analyze to update their beliefs, the more room is for implicit coordination. This might propagate escapes from the Cournot- Nash Equilibrium and the formation of cartels without explicit cooperative motives. In contrast to Green and Porter (1984), our results show that in a model with learning, breakdown of a cartel happens even without a demand shock. Moreover, in this model an expected price serves as an endogenous price threshold, which triggers a price war. Finally, by investigating the durations of the cooperative and price war phases, we find that in industries with a higher Nash equilibrium output and a lower volatility of firm-specific shocks, it is easier to maintain a cartel and harder to break it down.

Suggested Citation

  • Batlome Janjgava & Sergey Slobodyan, 2011. "Duopoly Competition, Escape Dynamics and Non-cooperative Collusion," CERGE-EI Working Papers wp445, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
  • Handle: RePEc:cer:papers:wp445
    as

    Download full text from publisher

    File URL: http://www.cerge-ei.cz/pdf/wp/Wp445.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Godfrey Keller & Sven Rady, 1999. "Optimal Experimentation in a Changing Environment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(3), pages 475-507.
    2. Yuliy Sannikov & Andrzej Skrzypacz, 2007. "Impossibility of Collusion under Imperfect Monitoring with Flexible Production," American Economic Review, American Economic Association, vol. 97(5), pages 1794-1823, December.
    3. Wieland, Volker, 2000. "Monetary policy, parameter uncertainty and optimal learning," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 199-228, August.
    4. Mirman, Leonard J & Samuelson, Larry & Urbano, Amparo, 1993. "Duopoly Signal Jamming," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(1), pages 129-149, January.
    5. Sanford J. Grossman & Richard E. Kihlstrom & Leonard J. Mirman, 1977. "A Bayesian Approach to the Production of Information and Learning By Doing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(3), pages 533-547.
    6. Michael H. Riordan, 1985. "Imperfect Information and Dynamic Conjectural Variations," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 41-50, Spring.
    7. Glenn Ellison, 1994. "Theories of Cartel Stability and the Joint Executive Committee," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 37-57, Spring.
    8. Mirman Leonard J. & Samuelson Larry & Schlee Edward E., 1994. "Strategic Information Manipulation in Duopolies," Journal of Economic Theory, Elsevier, vol. 62(2), pages 363-384, April.
    9. James W. Friedman, 1971. "A Non-cooperative Equilibrium for Supergames," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 38(1), pages 1-12.
    10. Green, Edward J & Porter, Robert H, 1984. "Noncooperative Collusion under Imperfect Price Information," Econometrica, Econometric Society, vol. 52(1), pages 87-100, January.
    11. Sakai, Yasuhiro, 1985. "The value of information in a simple duopoly model," Journal of Economic Theory, Elsevier, vol. 36(1), pages 36-54, June.
    12. Dilip Abreu & David Pearce & Ennio Stacchetti, 1997. "Optimal Cartel Equilibria with Imperfect monitoring," Levine's Working Paper Archive 632, David K. Levine.
    13. Subir K. Chakrabarti, 2010. "Collusive Equilibrium In Cournot Oligopolies With Unknown Costs," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(4), pages 1209-1238, November.
    14. Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October.
    15. Ellison, Martin & Scott, Andrew, 2013. "Learning and price volatility in duopoly models of resource depletion," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 806-820.
    16. Kenneth Kasa, 2004. "Learning, Large Deviations, And Recurrent Currency Crises," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(1), pages 141-173, February.
    17. Abreu, Dilip & Pearce, David & Stacchetti, Ennio, 1986. "Optimal cartel equilibria with imperfect monitoring," Journal of Economic Theory, Elsevier, vol. 39(1), pages 251-269, June.
    18. Kaneko, Mamoru, 1982. "Some remarks on the folk theorem in game theory," Mathematical Social Sciences, Elsevier, vol. 3(3), pages 281-290, October.
    19. Rustichini, Aldo & Wolinsky, Asher, 1995. "Learning about variable demand in the long run," Journal of Economic Dynamics and Control, Elsevier, vol. 19(5-7), pages 1283-1292.
    20. Balvers, Ronald J & Cosimano, Thomas F, 1990. "Actively Learning about Demand and the Dynamics of Price Adjustment," Economic Journal, Royal Economic Society, vol. 100(402), pages 882-898, September.
    21. Slade, Margaret E., 1990. "Strategic pricing models and interpretation of price-war data," European Economic Review, Elsevier, vol. 34(2-3), pages 524-537, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Batlome Janjgava, 2013. "Free Entry and Social Efficiency under Unknown Demand Parameters," CERGE-EI Working Papers wp495, The Center for Economic Research and Graduate Education - Economics Institute, Prague.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Taub, B., 2023. "Signal-jamming in the frequency domain," Games and Economic Behavior, Elsevier, vol. 142(C), pages 896-930.
    2. Connor, John M., 2003. "Private International Cartels: Effectiveness, Welfare, And Anticartel Enforcement," Staff Papers 28645, Purdue University, Department of Agricultural Economics.
    3. Godfrey Keller & Sven Rady, 1998. "Market Experimentation in a Dynamic Differentiated-Goods Duopoly," Game Theory and Information 9810001, University Library of Munich, Germany, revised 20 Aug 1999.
    4. Tim Willems, 2017. "Actively Learning by Pricing: A Model of an Experimenting Seller," Economic Journal, Royal Economic Society, vol. 127(604), pages 2216-2239, September.
    5. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899, November.
    6. Chaim Fershtman & Ariel Pakes, 2000. "A Dynamic Oligopoly with Collusion and Price Wars," RAND Journal of Economics, The RAND Corporation, vol. 31(2), pages 207-236, Summer.
    7. Robert Gagné & Simon van Norden & Bruno Versaevel, 2003. "Testing Optimal Punishment Mechanisms Under Price Regulation: the Case of the Retail Market for Gasoline," CIRANO Working Papers 2003s-57, CIRANO.
    8. Escobar, Juan F. & Llanes, Gastón, 2018. "Cooperation dynamics in repeated games of adverse selection," Journal of Economic Theory, Elsevier, vol. 176(C), pages 408-443.
    9. Fishman, Arthur & Rob, Rafael, 1998. "Experimentation and Competition," Journal of Economic Theory, Elsevier, vol. 78(2), pages 299-320, February.
    10. Osório-Costa, António M., 2009. "Efficiency Gains in Repeated Games at Random Moments in Time," MPRA Paper 13105, University Library of Munich, Germany.
    11. Richards, Timothy J. & Patterson, Paul M., 2004. "Causes of retail price fixity: an empirical analysis," Journal of Economics and Business, Elsevier, vol. 56(2), pages 117-136.
    12. Margaret C. Levenstein & Valerie Y. Suslow, 2002. "What Determines Cartel Success?," UMASS Amherst Economics Working Papers 2002-01, University of Massachusetts Amherst, Department of Economics.
    13. Daher, Wassim & Mirman, Leonard J. & Santugini, Marc, 2012. "Information in Cournot: Signaling with incomplete control," International Journal of Industrial Organization, Elsevier, vol. 30(4), pages 361-370.
    14. Maria Antonieta Cunha-e-Sa & Vasco Santos, 2007. "Experimentation with accumulation," Nova SBE Working Paper Series wp503, Universidade Nova de Lisboa, Nova School of Business and Economics.
    15. Christos Koulovatianos & Leonard J. Mirman & Marc Santugini, 2006. "Investment in a Monopoly with Bayesian Learning," Vienna Economics Papers vie0603, University of Vienna, Department of Economics.
    16. Christos Koulovatianos & Leonard J. Mirman & Marc Santugini, 2006. "Investment in a Monopoly with Bayesian Learning," Vienna Economics Papers 0603, University of Vienna, Department of Economics.
    17. Dan Bernhardt & Bart Taub, 2015. "Learning about common and private values in oligopoly," RAND Journal of Economics, RAND Corporation, vol. 46(1), pages 66-85, March.
    18. Mason, Robin & Välimäki, Juuso, 2011. "Learning about the arrival of sales," Journal of Economic Theory, Elsevier, vol. 146(4), pages 1699-1711, July.
    19. Kaplow, Louis & Shapiro, Carl, 2007. "Antitrust," Handbook of Law and Economics, in: A. Mitchell Polinsky & Steven Shavell (ed.), Handbook of Law and Economics, edition 1, volume 2, chapter 15, pages 1073-1225, Elsevier.
    20. Martin Peitz & Sven Rady & Piers Trepper, 2017. "Experimentation in Two-Sided Markets," Journal of the European Economic Association, European Economic Association, vol. 15(1), pages 128-172.

    More about this item

    Keywords

    beliefs; escape dynamics; implicit collusion; self-confirming equilibrium; learning;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cer:papers:wp445. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Lucie Vasiljevova (email available below). General contact details of provider: https://edirc.repec.org/data/eiacacz.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.