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Costly Renegotiation in Repeated Bertrand Games

  • Andersson, Ola

    ()

    (Dept. of Economics, Stockholm School of Economics)

  • Wengström, Erik

    ()

    (Department of Economics, University of Copenhagen)

This paper extends the concept of weak renegotiation-proof equilibrium (WRP) to allow for costly renegotiation and shows that even small renegotiation costs can have dramatic effects on the set of equilibria. More specifically, the paper analyzes the infinitely repeated Bertrand game. It is shown that for every level of renegotiation cost there exists a discount factor such that any collusive profit can be supported as an equilibrium outcome. Hence, any arbitrary small renegotiation cost will suffice to facilitate collusive outcomes for sufficiently patient firms. This result stands in stark contrast to the unique pure-strategy WRP equilibrium without renegotiation costs, which implies marginal-cost pricing in every period. Moreover, in comparison to the findings of McCutcheon (1997), who states that renegotiation costs have to be substantial to facilitate collusion, this result points to a quite different conclusion.

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Paper provided by Stockholm School of Economics in its series SSE/EFI Working Paper Series in Economics and Finance with number 725.

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Length: 8 pages
Date of creation: 22 Mar 2010
Date of revision:
Handle: RePEc:hhs:hastef:0725
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  1. McCutcheon, Barbara, 1997. "Do Meetings in Smoke-Filled Rooms Facilitate Collusion?," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 330-50, April.
  2. Kranz, Sebastian & Ohlendorf, Susanne, 2009. "Renegotiation-Proof Relational Contracts with Side Payments," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 259, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  3. repec:cup:cbooks:9780521016919 is not listed on IDEAS
  4. Farrell, Joseph & Maskin, Eric, 1987. "Renegotiation in Repeated Games," Department of Economics, Working Paper Series qt9wv3h5jb, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  5. Asheim, Geir B., 1991. "Extending renegotiation-proofness to infinite horizon games," Games and Economic Behavior, Elsevier, vol. 3(3), pages 278-294, August.
  6. van Damme, Eric, 1989. "Renegotiation-proof equilibria in repeated prisoners' dilemma," Journal of Economic Theory, Elsevier, vol. 47(1), pages 206-217, February.
  7. David Genesove & Wallace P. Mullin, 2001. "Rules, Communication and Collusion: Narrative Evidence from the Sugar Institute Case," NBER Working Papers 8145, National Bureau of Economic Research, Inc.
  8. Blume, A., 1991. "Intra-Play Communication in Repeated Games," Working Papers 91-29, University of Iowa, Department of Economics.
  9. Bernheim, B. Douglas & Peleg, Bezalel & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria I. Concepts," Journal of Economic Theory, Elsevier, vol. 42(1), pages 1-12, June.
  10. Aramendia, Miguel & Larrea, Concepcion & Ruiz, Luis, 2005. "Renegotiation in the repeated Cournot model," Games and Economic Behavior, Elsevier, vol. 52(1), pages 1-19, July.
  11. repec:cup:cbooks:9780521816632 is not listed on IDEAS
  12. Andersson, Ola & Wengstrom, Erik, 2007. "A note on renegotiation in repeated Bertrand duopolies," Economics Letters, Elsevier, vol. 95(3), pages 398-401, June.
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