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The Nature of Equilibria under Noncollusive Product Design and Collusive Pricing

Author

Listed:
  • Gongyun Zhao
  • Kali P. Rath

Abstract

It is well known that in a two stage duopoly model of product choice with quadratic transportation cost, the firms locate at the extreme endpoints of the market. This paper examines this model in an infinite horizon setting where in the initial period the firms choose locations and in subsequent periods choose prices. The firms collude in prices and share the profits on the profit possibility frontier. It is shown that under very general conditions, both the firms locating at the center is an equilibrium. It is not necessarily unique and multiple symmetric equilibria can exist. So, the products are not minimally differentiated and the degree of differentiation can vary. Sufficient conditions for three types of equilibria are given: a unique equilibrium at the center of the market, multiple symmetric equilibria and multiple asymmetric agglomerated equilibria. The first two cases obtain if the firms share profits equally when they are located at the same point and the last case otherwise.

Suggested Citation

  • Gongyun Zhao & Kali P. Rath, 2004. "The Nature of Equilibria under Noncollusive Product Design and Collusive Pricing," Econometric Society 2004 Australasian Meetings 106, Econometric Society.
    • Handle: RePEc:ecm:ausm04:106
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    More about this item

    Keywords

    Prodduct Differentiation; Transportation Cost; Collusive Pricing; cental agglomeration;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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