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’Be nice, unless it pays to fight’: A New Theory of Price Determination with Implications for Competition Policy
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’Be nice, unless it pays to fight’: A New Theory of Price Determination with Implications for Competition Policy

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  • Jan Boone

Abstract

This paper introduces a simple extensive form pricing game where firms can react to each others’ price changes before the customers arrive. The Bertrand outcome is a Nash equilibrium outcome in this game, but it is not necessarily subgame perfect. The subgame perfect equilibrium outcome features the following comparative static properties. The more similar firms are, the higher the equilibrium price. Further, a new firm that enters the industry or an existing firm that becomes more efficient can raise the equilibrium price. ZUSAMMENFASSUNG - (‘Sei nett, außer es zahlt sich aus zu kämpfen’: Eine neue Theorie der Preisbestimmung und ihre Bedeutung für die Wettbewerbspolitik) In diesem Beitrag wird die extensive Form eines einfachen Preisspiels vorgestellt, in dem jedes Unternehmen auf Preisänderungen des anderen reagieren kann, bevor die Kunden eintreffen. Das Bertrand-Ergebnis dieses Spiels ist ein Nash-Gleichgewicht, aber es ist nicht notwendigerweise Teilspielperfekt. Das teilspielperfekte Gleichgewicht hat die folgenden komparativ-statischen Eigenschaften. Je ähnlicher die Firmen sind, desto höher ist der Gleichgewichtspreis. Darüber hinaus kann, wenn eine neue Firma in den Markt eintritt oder eine bestehende effizienter wird, der Gleichgewichtspreis steigen.

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  • Jan Boone, 2002. "’Be nice, unless it pays to fight’: A New Theory of Price Determination with Implications for Competition Policy," CIG Working Papers FS IV 02-18, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    • Handle: RePEc:wzb:wzebiv:fsiv02-18
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    2. Jan Boone & Delia Ionascu & Kresimir Zigic, 2006. "Trade Policy, Market Leaders and Endogenous Competition Intensity," CERGE-EI Working Papers wp311, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    3. Zigic, Kresimir & Maçi, Ilir, 2011. "Competition policy and market leaders," Economic Modelling, Elsevier, vol. 28(3), pages 1042-1049, May.
    4. Kresimir Zigic, 2011. "Strategic Interactions in Markets with Innovative Activity: The Cases of Strategic Trade Policy and Market Leadership," CERGE-EI Books, The Center for Economic Research and Graduate Education - Economics Institute, Prague, edition 1, number b06, May.
    5. Boone, Jan & Žigić, Krešimir, 2015. "Trade policy in markets with collusion: The case of North–South R&D spillovers," Research in Economics, Elsevier, vol. 69(2), pages 224-237.
    6. Marcel Canoy & S. Onderstal, 2003. "Tight oligopolies: in search of proportionate remedies," CPB Document 29, CPB Netherlands Bureau for Economic Policy Analysis.
    7. Marcel Canoy & S. Onderstal, 2003. "Tight oligopolies: in search of proportionate remedies," CPB Document 29.rdf, CPB Netherlands Bureau for Economic Policy Analysis.

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    More about this item

    Keywords

    Intermediation; Bertrand paradox; price leadership; mergers; joint dominance; balance of power;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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