SSE/EFI Working Paper Series in Economics and Finance
No 725:
Costly Renegotiation in Repeated Bertrand Games
Ola Andersson ()
and Erik Wengström ()
Abstract: This paper extends the concept of weak renegotiation-proof
equilibrium (WRP) to allow for costly renegotiation and shows that even
small renegotiation costs can have dramatic effects on the set of
equilibria. More specifically, the paper analyzes the infinitely repeated
Bertrand game. It is shown that for every level of renegotiation cost there
exists a discount factor such that any collusive profit can be supported as
an equilibrium outcome. Hence, any arbitrary small renegotiation cost will
suffice to facilitate collusive outcomes for sufficiently patient firms.
This result stands in stark contrast to the unique pure-strategy WRP
equilibrium without renegotiation costs, which implies marginal-cost
pricing in every period. Moreover, in comparison to the findings of
McCutcheon (1997), who states that renegotiation costs have to be
substantial to facilitate collusion, this result points to a quite
different conclusion.
Keywords: Noncooperative game theory; Weak Renegotiation-proofness; Costly Renegotation; Repeated Bertrand games; (follow links to similar papers)
JEL-Codes: C72; D43; (follow links to similar papers)
8 pages, March 22, 2010
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