Dynamic Bertrand competition with intertemporal demand

Jörgen Weibull, Prajit Dutta and Alexander Matros
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Prajit Dutta: Columbia University

No 493, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: In the text-book model of dynamic Bertrand competition, competing firms meet the same demand function every period. This is not a satisfactory model of the demand side if consumers can make intertemporal substitution between periods. Each period then leaves some residual demand to future periods, and consumers who observe price under-cutting may correctly anticipate en ensuing price war and therefore postpone their purchases. Accordingly, the interaction between the firms no longer constitutes a repeated game, and hence falls outside the domain of the usual Folk theorems.

We analyze collusive pricing in such situations, and study cases when consumers have perfect and imperfect foresight and varying degrees of patience. It turns out that collusion against patient and forward-looking consumers is easier to sustain than collusion in the text-book model.

Keywords: Bertrand competition; Coase conjecture; dynamic oligopoly; stochastic games (search for similar items in EconPapers)
JEL-codes: C73 D43 D91 D92 L13 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2002-03-01, Revised 2005-02-15
New Economics Papers: this item is included in nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:hastef:0493

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