Scandinavian Working Papers in Economics
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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 206:
Sequential Moves and Tacit Collusion: Reaction-Function Cycles in a Finite Pricing Duopoly

Klaus Wallner

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.

Keywords: Bertrand duopoly; price competition; finite horizon; price cycles; sequential moves; reaction function cycles; (follow links to similar papers)

JEL-Codes: C73; D43; L10; L13; (follow links to similar papers)

15 pages, November 11, 1997, Revised July 3, 1998

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This paper is forthcoming as:
Wallner, Klaus, 'Sequential Moves and Tacit Collusion: Reaction-Function Cycles in a Finite Pricing Duopoly', Journal of Economic Theory.

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