Price Competition with Decreasing Returns-to-Scale: A General Model of Bertrand-Edgeworth Duopoly

Blake Allison () and Jason Lepore ()
Additional contact information
Blake Allison: Department of Economics, Emory University
Jason Lepore: Department of Economics, California Polytechnic State University

No 1607, Working Papers from California Polytechnic State University, Department of Economics

Abstract: We present a novel approach to analyzing models of price competition. By realizing price competition as a class of all-pay contests, we are able to generalize the models in which pricing behavior can be characterized, accommodating convex (possibly asymmetric) cost structures and general demand rationing schemes. Using this approach, we identify necessary and sufficient conditions for a pure strategy equilibrium and use them to demonstrate the fragility of deterministic outcomes in pricing games. Consequently, we characterize bounds on equilibrium pricing and profits of all mixed strategy equilibria and examine the effect of demand and supply shifts on those bounds. Our focus on bounds can be motivated by the potential for multiple non-payoff equivalent equilibria, as we identify two types of equilibrium strategies through a derivation of sufficient conditions for uniqueness of equilibrium.

Keywords: Price competition; Contest; Demand rationing; Convex costs; Capacity constraints (search for similar items in EconPapers)
Pages: 42 pages
Date: 2016
New Economics Papers: this item is included in nep-com, nep-ind and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:cpl:wpaper:1607

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