Conscious Parallelism and Predatory Pricing in a Contestable Market
This paper studies the "rationality" of conscious parallelism and predatory pricing in the context of a dynamic oligopoly model. The doctrine of conscious parallelism is modelled as the outcome of a signalling game in which the rules of response are specified axiomatically. This results in a unique solution based on firms' need to have consistent expectations the subsequently generate collusive behaviour. With free entry and exit, or contestibility, predatory pricing can deter entry. The solution concept used is subgame perfect Nash equilibria. In contrast to the contestable markets theory, not only is conscious parallelism and predatory pricing consistent with rational profit maximization, but this behaviour can also result in long-run positive profits even with costless entry and exit.
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