Sequential Moves and Tacit Collusion: Reaction-Function Cycles in a Finite Pricing Duopoly

Klaus Wallner
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Klaus Wallner: Stockholm Institute of Transition Economics and East European Economies (SITE), Postal: Stockholm School of Economics, P.O. Box 6501, S-113 83 Stockholm, Sweden

No 206, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: This paper analyzes a finite horizon, sequential move pricing duopoly, restricting attention to Markov-strategies. The solution yields stationary patterns, independent of initial conditions, where the reaction-functions follow cycles of three periods. The market price never settles down, and is at all times strictly above marginal cost. Long-run average industry profits are approximately 5/6 of the monopoly level. These results demonstrate that neither a long horizon, nor non-Markovian strategies are required for persistent profits in dynamic price-competition games.

Keywords: Bertrand duopoly; price competition; finite horizon; price cycles; sequential moves; reaction function cycles (search for similar items in EconPapers)
JEL-codes: C73 D43 L10 L13 (search for similar items in EconPapers)
Pages: 15 pages
Date: 1997-11-11, Revised 1998-07-03
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Forthcoming in Journal of Economic Theory.

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