(), Prajit Dutta
and Alexander Matros
Jörgen Weibull: Dept. of Economics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden
Prajit Dutta: Columbia University
Alexander Matros: University College London
Abstract: In the text-book model of dynamic Bertrand competition, competing firms meet the same demand function every period. This is not a satisfactory model of the demand side if consumers can make intertemporal substitution between periods. Each period then leaves some residual demand to future periods, and consumers who observe price under-cutting may correctly anticipate en ensuing price war and therefore postpone their purchases. Accordingly, the interaction between the firms no longer constitutes a repeated game, and hence falls outside the domain of the usual Folk theorems. We analyze collusive pricing in such situations, and study cases when consumers have perfect and imperfect foresight and varying degrees of patience. It turns out that collusion against patient and forward-looking consumers is easier to sustain than collusion in the text-book model.
21 pages, First version: March 1, 2002. Revised: February 15, 2005.
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