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Sequential Moves and Tacit Collusion: Reaction-Function Cycles in a Finite Pricing Duopoly

Author

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  • Wallner, Klaus

    (Stockholm Institute of Transition Economics and East European Economies (SITE))

Abstract

This paper analyzes a finite horizon, sequential move pricing duopoly, restricting attention to Markov-strategies. The solution yields stationary patterns, independent of initial conditions, where the reaction-functions follow cycles of three periods. The market price never settles down, and is at all times strictly above marginal cost. Long-run average industry profits are approximately 5/6 of the monopoly level. These results demonstrate that neither a long horizon, nor non-Markovian strategies are required for persistent profits in dynamic price-competition games.

Suggested Citation

  • Wallner, Klaus, 1997. "Sequential Moves and Tacit Collusion: Reaction-Function Cycles in a Finite Pricing Duopoly," SSE/EFI Working Paper Series in Economics and Finance 206, Stockholm School of Economics, revised 03 Jul 1998.
    • Handle: RePEc:hhs:hastef:0206
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    More about this item

    Keywords

    Bertrand duopoly; price competition; finite horizon; price cycles; sequential moves; reaction function cycles;
    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
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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