Firms Set Prices Research Articles

Why is Cournot Cournot and Bertrand Bertrand? The Role of the Strategic Variable in One-Shot Oligopoly Games

In Cournot games the strategic variable is output and players maximize profits assuming that the other players keep their outputs fixed. In Bertrand games the strategic variable is price and players assume the other players to keep their prices fixed. In this article I argue that it is not the strategic variable what determines the equilibrium of the game, but what is assumed fixed. A game in which firms set prices but assume the other firms to keep their outputs fixed leads to the Cournot equilibrium and when firms set outputs but assume prices fixed, the Bertrand equilibrium is obtained. In general, what matters for the equilibrium is not what you set but what you assume fixed. This insight has a bearing on discussions about what kind of competition is most likely to occur in markets with certain characteristics. It also has a bearing on the Nash character of the equilibria. Moreover, the diminished role for the strategic variable fundamentally affects the analysis of unilateral effects from mergers and tacit collusion.

Price dynamics and collusion under short-run price commitments

We consider a dynamic homogeneous oligopoly in which firms set prices repeatedly. Theory predicts that short-run price commitments increase profits and may lead to less price stability. The experiments that we conducted provide support for the first effect and against the second effect when a random ending rule is applied. When a fixed ending rule is applied, we find no significant impact of short-run price commitments on profits and price stability.

Preference‐Based Discrimination and Profit: On the Profitability of Discriminatory Spatial Policy

In many markets, firms are able to conduct discriminatory strategies based on whether a customer prefers a competitors' product or their own. This article considers the impact of such discrimination in duopoly models in which firms set prices and conduct precontract‐customization efforts for some customers. We identify two effects: (1) The ability to conduct preference‐based discrimination increases equilibrium profit as long as long as precontract customization is at least modestly important in competitive dynamics; and (2) The ability to conduct preference‐based discrimination enhances social welfare if any precontract customization is done.

Advance‐Purchase Discounts and Price Discrimination in Competitive Markets

When both individual and aggregate consumer demand is uncertain and firms set prices before demand is known, price‐taking firms may offer advance‐purchase discounts. Consumers with relatively more certain demands and with relatively lower valuations have an incentive to buy in advance the presence of other consumers with higher valuations and more uncertain aggregate demand increases the price they expect to pay in the spot market. Advance‐purchase sales are made to low‐valuation customers, as predicted by traditional models of second‐degree price discrimination, without assuming that firms have market power.

Integrated circuit (IC) pricing

This article examines the method by which firms set prices for integrated circuits and some of the assumptions used for price projections by manufacturers. A brief review of the literature on pricing is compares pricing practices of some major manufacturers. A rule of thumb pricing forecast used by some analysts is examined against 10 years of historical data. The data suggest that producers commonly achieve excess capacity in their markets as products mature resulting in unanticipated price cutting.

Capacity precommitment as an entry barrier for price-setting firms

For a Bertrand-Edgeworth framework, this paper considers whether investmentin capacity may serve as a barrier to entry when firms are identical except for the first mover precommitment possibilities that the incumbent enjoys. Subgame-perfect Nash equilibria are examined for a three-stage non-cooperative game in which the incumbent sets a capacity level, the potential entrant chooses its capacity, and then firms set prices using mixed strategies. For some parameter values, entry is blockaded: positive profits for the entrant are precluded. For other parameter values, the incumbent may increase its capacity to prevent entry and maintain non-negative profits.

Export subsidies for differentiated products

Export subsidies in differentiated product markets are examined in a framework where the decision to establish subsidy programs occurs first, but firms set prices before governments set subsidy levels. In contrast to earlier results that governments should tax the exports of Bertrand firms when subsidy levels are set before prices, positive subsidies can be optimal. Adoption of a subsidy program by one producer's government does not necessarily hurt the unsubsidized competitor. The subsidy itself hurts, but the program facilitates collusion. The results highlight the importance of timing and the distinction between the effects of policy regimes and policy instruments.