Repeated Games and Price Wars

Ronald Peeters, Hans Peters, Erik Pot, Dries Vermeulen

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Abstract

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).
Original languageEnglish
Title of host publicationGame Theory and Applications
Subtitle of host publication3rd Joint China-Dutch Workshop and 7th China Meeting GTA 2016, Fuzhou, China, November 20-23, 2016 Revised Selected Papers
EditorsDeng-Feng Li, Xiao-Guang Yang, Marc Uetz, Gen-Jiu Xu
PublisherSpringer
Pages3-17
ISBN (Electronic)978-981-10-6753-2
ISBN (Print)978-981-10-6752-5
DOIs
Publication statusPublished - 2017

Publication series

SeriesCommunications in Computer and Information Science book series (CCIS)
Volume758

Cite this

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