Costly renegotiation in repeated Bertand games
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Costly renegotiation in repeated Bertand games. / Andersson, Ola; Wengström, Erik Roland.
In: Contributions to Theoretical Economics, Vol. 10, No. 1, 2010, p. Article 51.Research output: Contribution to journal › Journal article › Research › peer-review
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TY - JOUR
T1 - Costly renegotiation in repeated Bertand games
AU - Andersson, Ola
AU - Wengström, Erik Roland
PY - 2010
Y1 - 2010
N2 - This paper extends the concept of weak renegotiation-proof equilibrium (WRP) to allow for costly renegotiation and shows that even small renegotiation costs can have dramatic effects on the set of equilibria. More specifically, the paper analyzes the infinitely repeated Bertrand game. It is shown that for every level of renegotiation cost, there exists a discount factor such that any collusive profit can be supported as an equilibrium outcome. Hence, any arbitrary small renegotiation cost will suffice to facilitate collusive outcomes for sufficiently patient firms. This result stands in stark contrast to the unique pure strategy WRP equilibrium without renegotiation costs, which implies marginal-cost pricing in every period. Moreover, in comparison to the findings of McCutcheon (1997), who states that renegotiation costs have to be substantial to facilitate collusion, this result points to a quite different conclusion.
AB - This paper extends the concept of weak renegotiation-proof equilibrium (WRP) to allow for costly renegotiation and shows that even small renegotiation costs can have dramatic effects on the set of equilibria. More specifically, the paper analyzes the infinitely repeated Bertrand game. It is shown that for every level of renegotiation cost, there exists a discount factor such that any collusive profit can be supported as an equilibrium outcome. Hence, any arbitrary small renegotiation cost will suffice to facilitate collusive outcomes for sufficiently patient firms. This result stands in stark contrast to the unique pure strategy WRP equilibrium without renegotiation costs, which implies marginal-cost pricing in every period. Moreover, in comparison to the findings of McCutcheon (1997), who states that renegotiation costs have to be substantial to facilitate collusion, this result points to a quite different conclusion.
KW - Faculty of Social Sciences
U2 - 10.2202/1935-1704.1719
DO - 10.2202/1935-1704.1719
M3 - Journal article
VL - 10
SP - Article 51
JO - Contributions to Theoretical Economics
JF - Contributions to Theoretical Economics
SN - 1534-5971
IS - 1
ER -
ID: 32305489