Working Paper: CEPR ID: DP3342
Authors: Jan Boone
Abstract: 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.
Keywords: Bertrand Paradox; Efficiency Offense; Joint Dominance; Mergers; Price Leadership
JEL Codes: D43; L11; L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| similarity of firms' costs (D21) | equilibrium price (D41) |
| new firm entering market (M13) | equilibrium price (D41) |
| efficiency gains in existing firms (D21) | equilibrium price (D41) |
| mergers (G34) | equilibrium price (D41) |
| mergers (G34) | competitive dynamics (L13) |
| competitive dynamics (L13) | equilibrium price (D41) |
| strategic decisions of firms (L21) | equilibrium price (D41) |
| expectations of competitors' behavior (L13) | equilibrium price (D41) |