DP3342 'Be Nice, Unless it Pays to Fight': A New Theory of Price Determination with Implications for Competition Policy

Author(s): Jan Boone
Publication Date: April 2002
Keyword(s): bertrand paradox, efficiency offense, joint dominance, mergers, price leadership
JEL(s): D43, L11, L41
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=3342

This Paper introduces a simple extensive form pricing game. 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. The subgame perfect equilibrium is used to formalize price leadership, joint dominance and efficiency offence.