Optimal Punishment in Supergames with Product Differentiation

Luca Lambertini () and D. Sasaki

No 607, Department of Economics - Working Papers Series from The University of Melbourne

Abstract: We analyse optimal penal codes in both Bertrand and Cournot supergames with product differentiation. We prove that the relationship between optimal punishments and the security level (individually rational discounted profit stream) depends critically on the degree of supermodularity in the stage game, using a duopoly supergame with product differentiation. The security level in the punishment phase is reached only under extreme supermodularity, i.e., when products are perfect substitutes and firms are price setters. Finally, we show that Abreu's rule cannot be implemented under Cournot behaviour and strong demand complementarity between products.

Keywords: GAMES; PENAL SANCTIONS (search for similar items in EconPapers)
JEL-codes: C72 D43 L13 (search for similar items in EconPapers)
Pages: 15 pages
Date: 1998
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