The only Dance in Town: Unique Equilibrium in a Generalized Model of Price Competition

Johannes Johnen and David Ronayne

No 3187, LIDAM Reprints CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: We study a canonical model of simultaneous price competition between firms that sell a homogeneous good to consumers who are characterized by the number of prices they are exogenously aware of. Our setting subsumes many employed in the literature over the last several decades. We show there is a unique equilibrium if and only if there exist some consumers who are aware of exactly two prices. The equilibrium we derive is in symmetric mixed strategies. Furthermore, when there are no consumers aware of exactly two prices, we show there is an uncountable-infinity of asymmetric equilibria in addition to the symmetric equilibrium. Our results show the paradigm generically produces a unique equilibrium. We also show that the commonly-sought symmetric equilibrium (which also nests the textbook Bertrand pure strategy equilibrium as a special case) is robust to perturbations in consumer behavior, while the asymmetric equilibria are not.

Keywords: Price competition; price dispersion; unique equilibrium (search for similar items in EconPapers)
Pages: 16
Date: 2021-03-06
Note: In: The Journal of Industrial Economics, 2021, vol. 69(3), p. 595-614
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Citations: View citations in EconPapers (7)

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Journal Article: The only Dance in Town: Unique Equilibrium in a Generalized Model of Price Competition (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:cor:louvrp:3187

DOI: 10.1111/joie.12264

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