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Imitation by price and quantity setting firms in a differentiated market

  • Khan A.
  • Peeters R.J.A.P.

    (GSBE)

We study the evolution of imitation behaviour in a differentiated market where firms are located equidistantly on a Salop circle. Firms choose price and quantity simultaneously, leaving open the possibility for non-market clearing outcomes. The strategy of the most successful firm is imitated. Behaviour in the stochastically stable outcome depends on the level of market differentiation and corresponds exactly with the Nash equilibrium of the underlying game. For high level of differentiation, firms end up at the monopoly outcome. For intermediate level of differentiation, they gravitate to a mutually non-aggressive outcome where price is higher than the monopoly price. For low level of differentiation, firms price at a mark-up above the marginal cost. Market clearing always results endogenously.

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File URL: http://pub.maastrichtuniversity.nl/a45dd07a-d609-408a-aeea-30af1b5d7f58
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Paper provided by Maastricht University, Graduate School of Business and Economics (GSBE) in its series Research Memorandum with number 022.

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Date of creation: 2013
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Handle: RePEc:unm:umagsb:2013022
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