Price wars in strategical price‐setting supergames: Application to the retail oil industry

Yassine Badra

Australian Economic Papers, 2022, vol. 61, issue 3, 395-409

Abstract: In the gasoline retailing industry, firms are divided into two classes: major integrated international firms and independent local ones. This paper seeks to define the optimal pricing strategy to adopt in a price war situation with the majors in one side and the locals in the other. A sequential infinite horizon game model assuming an initial state of tacit collusion with linear demand and total cost functions is developed. It turns out that the optimal strategy is discontinuous. The duopoly's profit maximisation is achieved with a collusion price higher than the competitive Nash price. Finally, statics comparatives show how the variations in the parameters of the model impact the pricing strategy of each firm, whether it is an international major firm or an independent local firm.

Date: 2022
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