Reciprocity, inequity aversion, and oligopolistic competition

Luis Santos-Pinto ()

Nova SBE Working Paper Series from Universidade Nova de Lisboa, Nova School of Business and Economics

Abstract: This paper studies how reciprocity and inequity aversion influence the behavior of firms in imperfectly competitive markets. The paper shows that if reciprocal firms compete la Cournot, then they are able to sustain collusive outcomes under a positive reciprocity equilibrium. By contrast, Stackelberg warfare outcomes may emerge under a negative reciprocity equilibrium. The results for inequity aversion are similar. Cournot competition between inequity averse firms can be harmful to consumers if it leads to equilibria where firms feel compassion toward each other. However, in equilibria where inequity averse firms are envious of each other consumers are better off than if firms were selfish. The paper also shows that only under very restrictive conditions does reciprocity or inequity aversion have an impact on Bertrand competition. Finally, the paper shows that non-selfish preferences have a greater impact on equilibrium outcomes in markets with a small number of firms.

Keywords: Cournot; Bertrand; reciprocity; inequity aversion (search for similar items in EconPapers)
JEL-codes: D43 D63 L13 L21 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2007
New Economics Papers: this item is included in nep-bec, nep-com, nep-ind, nep-mic, nep-mkt, nep-soc and nep-upt
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Working Paper: Reciprocity, inequity-aversion, and oligopolistic competition (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:unl:unlfep:wp506

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