COLLUSION AND PREDATION UNDER THE CONDITION OF STOCHASTIC BANKRUPTCY

Toshikazu Kawakami

The Japanese Economic Review, 2010, vol. 61, issue 3, 408-426

Abstract: In this paper, on the basis of the framework of repeated games, we consider the strategic interaction between firms that may face financial constraints and go into bankruptcy when they earn low profit. We demonstrate that under asymmetric information concerning the financial constraints of the rival firm, firms adopt a pricing pattern wherein they switch to high (or collusive) prices after maintaining low prices for some periods. There are always such predatory pricing strategies sustained as equilibria when firms are sufficiently patient. We also show that the set of feasible and individual rational payoffs becomes narrower than that of the ordinal repeated games.

Date: 2010
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https://doi.org/10.1111/j.1468-5876.2009.00487.x

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