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Dynamic Bertrand competition with intertemporal demand

Author

Listed:
  • Weibull, Jörgen

    (Dept. of Economics, Stockholm School of Economics)

  • Dutta, Prajit

    (Columbia University)

  • Matros, Alexander

    (University College London)

Abstract

In the text-book model of dynamic Bertrand competition, competing firms meet the same demand function every period. This is not a satisfactory model of the demand side if consumers can make intertemporal substitution between periods. Each period then leaves some residual demand to future periods, and consumers who observe price under-cutting may correctly anticipate en ensuing price war and therefore postpone their purchases. Accordingly, the interaction between the firms no longer constitutes a repeated game, and hence falls outside the domain of the usual Folk theorems. We analyze collusive pricing in such situations, and study cases when consumers have perfect and imperfect foresight and varying degrees of patience. It turns out that collusion against patient and forward-looking consumers is easier to sustain than collusion in the text-book model.

Suggested Citation

  • Weibull, Jörgen & Dutta, Prajit & Matros, Alexander, 2002. "Dynamic Bertrand competition with intertemporal demand," SSE/EFI Working Paper Series in Economics and Finance 493, Stockholm School of Economics, revised 15 Feb 2005.
  • Handle: RePEc:hhs:hastef:0493
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    References listed on IDEAS

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    More about this item

    Keywords

    Bertrand competition; Coase conjecture; dynamic oligopoly; stochastic games;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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