A Theory of Dynamic Oligopoly, II: Price Competition, Kinked Demand Curves, and Edgeworth Cycles Export

@article{citeulike:3680314, abstract = {We provide game theoretic foundations for the classic kinked demand curve equilibrium and Edgeworth cycle. We analyze a model in which firms take turns choosing prices; the model is intended to capture the idea of reactions based on short-run commitment. In a Markov perfect equilibrium (MPE), a firm's move in any period depends only on the other firm's current price. There are multiple MPE's, consisting of both kinked demand curve equilibria and Edgeworth cycles. In any MPE, profit is bounded away from the Bertrand equilibrium level. We show that a kinked demand curve at the monopoly price is the unique symmetric "renegotiation proof" equilibrium when there is little discounting. We then endogenize the timing by allowing firms to move at any time subject to we short-run commitments. We find that firms end up alternating, thus vindicating the ad hoc timing assumption of our simpler model. We also discuss how the model can be enriched to provide explanations for excess capacity and market sharing.}, author = {Maskin, E. and Tirole, J.}, citeulike-article-id = {3680314}, journal = {Econometrica}, keywords = {game\_theory, industrial\_organization, microeconomic\_theory}, number = {3}, pages = {571--599}, posted-at = {2008-11-24 06:53:47}, priority = {5}, title = {A Theory of Dynamic Oligopoly, II: Price Competition, Kinked Demand Curves, and Edgeworth Cycles}, volume = {56}, year = {1988} }

TY - JOUR ID - citeulike:3680314 L3 - citeulike-article-id:3680314 N2 - We provide game theoretic foundations for the classic kinked demand curve equilibrium and Edgeworth cycle. We analyze a model in which firms take turns choosing prices; the model is intended to capture the idea of reactions based on short-run commitment. In a Markov perfect equilibrium (MPE), a firm's move in any period depends only on the other firm's current price. There are multiple MPE's, consisting of both kinked demand curve equilibria and Edgeworth cycles. In any MPE, profit is bounded away from the Bertrand equilibrium level. We show that a kinked demand curve at the monopoly price is the unique symmetric "renegotiation proof" equilibrium when there is little discounting. We then endogenize the timing by allowing firms to move at any time subject to we short-run commitments. We find that firms end up alternating, thus vindicating the ad hoc timing assumption of our simpler model. We also discuss how the model can be enriched to provide explanations for excess capacity and market sharing. IS - 3 JF - Econometrica EP - 599 TI - A Theory of Dynamic Oligopoly, II: Price Competition, Kinked Demand Curves, and Edgeworth Cycles VL - 56 SP - 571 KW - game_theory KW - industrial_organization KW - microeconomic_theory AU - Maskin, E AU - Tirole, J PY - 1988/// ER -