Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

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

Klaus Wallner
Additional contact information
Klaus Wallner: Stockholm Institute of Transition Economics and East European Economies (SITE), Postal: Stockholm School of Economics, P.O. Box 6501, S-113 83 Stockholm, Sweden

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

JEL-codes: C73; D43; L10; L13

15 pages, First version: November 11, 1997. Revised: July 3, 1998.

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