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Reciprocity, inequity-aversion, and oligopolistic competition

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  • Santos-Pinto, Luís

Abstract

This paper extends the Cournot and Bertrand models of strategic interaction between firms by assuming that managers are not only profit maximizers, but also have preferences for reciprocity or are averse to inequity. A reciprocal manager responds to unkind behavior of rivals with unkind actions, while at the same time, it responds to kind behavior of rivals with kind actions. An inequity averse manager likes to reduce the difference between own profits and the rivals’ profits. The paper finds that if firms with reciprocal managers compete à la Cournot, then they may be able to sustain “collusive” outcomes under a constructive reciprocity equilibrium. By contrast, Stackelberg warfare may emerge under a destructive reciprocity equilibrium. If there is Cournot competition between firms and their managers are averse to advantageous (disadvantageous) inequity, then firms are better (worse) off than if managers only care about maximizing profits. If firms compete à la Bertrand, then only under very restrictive conditions will managers’ preferences for reciprocity or inequity aversion have an impact on equilibrium outcomes.

Suggested Citation

  • Santos-Pinto, Luís, 2006. "Reciprocity, inequity-aversion, and oligopolistic competition," MPRA Paper 3143, University Library of Munich, Germany, revised 14 Apr 2007.
  • Handle: RePEc:pra:mprapa:3143
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    File URL: https://mpra.ub.uni-muenchen.de/3143/1/MPRA_paper_3143.pdf
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    References listed on IDEAS

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    1. Ernst Fehr & Klaus M. Schmidt, 1999. "A Theory of Fairness, Competition, and Cooperation," The Quarterly Journal of Economics, Oxford University Press, vol. 114(3), pages 817-868.
    2. Dastidar, Krishnendu Ghosh, 1995. "On the Existence of Pure Strategy Bertrand Equilibrium," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 5(1), pages 19-32, January.
    3. Segal, Uzi & Sobel, Joel, 2007. "Tit for tat: Foundations of preferences for reciprocity in strategic settings," Journal of Economic Theory, Elsevier, vol. 136(1), pages 197-216, September.
    4. Santos-Pinto, Luís, 2008. "Making sense of the experimental evidence on endogenous timing in duopoly markets," Journal of Economic Behavior & Organization, Elsevier, vol. 68(3-4), pages 657-666, December.
    5. Englmaier, Florian & Wambach, Achim, 2010. "Optimal incentive contracts under inequity aversion," Games and Economic Behavior, Elsevier, vol. 69(2), pages 312-328, July.
    6. Pinto, Luis Santos, 2007. "Collusion and Reciprocity in Infinitely Repeated Games," FEUNL Working Paper Series wp512, Universidade Nova de Lisboa, Faculdade de Economia.
    7. Vesna Prasnikar & Alvin E. Roth, 1992. "Considerations of Fairness and Strategy: Experimental Data from Sequential Games," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 865-888.
    8. Axel Ockenfels & Gary E. Bolton, 2000. "ERC: A Theory of Equity, Reciprocity, and Competition," American Economic Review, American Economic Association, vol. 90(1), pages 166-193, March.
    9. Huck, Steffen & Normann, Hans-Theo & Oechssler, Jorg, 2004. "Two are few and four are many: number effects in experimental oligopolies," Journal of Economic Behavior & Organization, Elsevier, vol. 53(4), pages 435-446, April.
    10. Nabil Al-Najjar & Sandeep Baliga & David Besanko, 2008. "Market forces meet behavioral biases: cost misallocation and irrational pricing," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 214-237.
    11. Dominique Demougin & Claude Fluet, 2003. "Inequity Aversion in Tournaments," Cahiers de recherche 0322, CIRPEE.
    12. William Neilson, 2006. "Axiomatic reference-dependence in behavior toward others and toward risk," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 28(3), pages 681-692, August.
    13. Rabin, Matthew, 1993. "Incorporating Fairness into Game Theory and Economics," American Economic Review, American Economic Association, vol. 83(5), pages 1281-1302, December.
    14. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x, January.
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    Cited by:

    1. Doruk İriş & Luís Santos-Pinto, 2013. "Tacit Collusion under Fairness and Reciprocity," Games, MDPI, Open Access Journal, vol. 4(1), pages 1-16, February.
    2. Santos-Pinto, Luís, 2008. "Making sense of the experimental evidence on endogenous timing in duopoly markets," Journal of Economic Behavior & Organization, Elsevier, vol. 68(3-4), pages 657-666, December.

    More about this item

    Keywords

    Reciprocity; Inequity Aversion; Cournot; Bertrand;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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