This paper is an attempt to reconcile the – at first sight different – views on the determinants of collusion and price wars expressed in rotemberg and saloner ,(1986), green and porter ,(1984), and stigler ,(1964). We first argue that the logic of rotemberg and saloner ,(1986) presupposes two determinants for collusion, namely (1) market shares are publicly observable, and (2) volatility of market shares due to exogenous factors is limited. We make our arguments in a model in which firms repeatedly play a bertrand type price competition game, while market shares are determined by a stochastic process, conditional on current market shares and prices. Following rotemberg and saloner ,(1986), we show under the two conditions of public observability and limited volatility of market shares that firms can collude using dynamic price adjustment strategies. We show that when the first condition (public observability) is violated, we revert to the logic of green and porter ,(1984). When the second condition (limited volatility of market shares) is violated, for example when consumer loyalty has decreased, we also observe that collusion can no longer be sustained, in line with the arguments in stigler ,(1964).
|Title of host publication||Game Theory and Applications|
|Subtitle of host publication||3rd Joint China-Dutch Workshop and 7th China Meeting GTA 2016, Fuzhou, China, November 20-23, 2016 Revised Selected Papers|
|Editors||Deng-Feng Li, Xiao-Guang Yang, Marc Uetz, Gen-Jiu Xu|
|Publication status||Published - 2017|
|Series||Communications in Computer and Information Science book series (CCIS)|
Peeters, R., Peters, H., Pot, E., & Vermeulen, D. (2017). Repeated Games and Price Wars. In D-F. Li, X-G. Yang, M. Uetz, & G-J. Xu (Eds.), Game Theory and Applications: 3rd Joint China-Dutch Workshop and 7th China Meeting GTA 2016, Fuzhou, China, November 20-23, 2016 Revised Selected Papers (pp. 3-17). Springer. Communications in Computer and Information Science book series (CCIS), Vol.. 758 https://doi.org/10.1007/978-981-10-6753-2_1