Price Competition In Oligopoly Research Articles

Stability of Equilibrium Prices in a Dynamic Duopoly Bertrand Game with Asymmetric Information and Cluster Spillovers

Bounded rationality, asymmetric information and spillover effects are widespread in the economic market, and had been studied extensively in oligopoly games, but few references discussed incomplete information in a duopoly market with rationality expectations. Considering the positive externalities brought by the spillover effect between enterprises in a cluster, a duopoly Bertrand game with bounded rationality and asymmetric information is proposed in this paper. In our model, a firm with private information, high or low marginal cost, is introduced. Interestingly, our theoretical analysis reveals that: (1) In a dynamic duopoly Bertrand game with perfect rationality and asymmetric information, the equilibrium price is positively correlated with product substitution rate and the probability of a high marginal cost, while it is negatively correlated with the cluster spillover. (2) In a dynamic duopoly Bertrand game with asymmetric information and adaptive expectation adopted by both firms, the Nash equilibrium prices are always asymptotically stable. (3) In a dynamic duopoly Bertrand game with heterogenous expectation and asymmetric information, where two firms use adaptive expectation and boundedly rational expectation respectively, the Nash equilibrium prices are locally stable under certain conditions. Furthermore, results indicate that, high product substitution rate or large probability of high marginal cost for firm 2 with private information may make the market price unstable, bifurcating or even falling into chaos, while high technology spillover is conducive to stabilize the market by contrast. It is also shown that the chaos can be controlled by a hybrid control strategy with the state variables feedback and parameter variation. Our research has an important theoretical and practical significance to the price competition in oligopoly markets.

Models of strategic interaction in quantities vs. prices with differentiated goods

Two important topics in industrial organization are the difference between quantity and price competition in oligopoly, and the role of product differentiation in determining market outcomes. We consider a consistent framework in which these issues can be explored, using a base model of product differentiation. We consider the properties of the market outcomes under price and quantity competition, with both simultaneous and sequential moves. We then present a series of numerical simulation models that can be used to efficiently explore the model properties under various assumptions. The models are built in Excel, and utilize both numerical and graphical presentations. They are suitable for classroom use in presentations, and in directed student assignments. We discuss a number of exercises, and our experiences with using the models in a number of different course contexts.

Evolutionarily Stable Quality and Price in Oligopoly: A Comparison with Nash

The article proposes an evolutionary game theoretical analysis of quality and price competition in oligopoly. Using the notion of a finite population evolutionarily stable strategy (FPESS) defined by Schaffer (1989), the relative payoff maximizing behavior is compared with the absolute payoff maximizing behavior. In the literature of IO on quality competition, two different assumptions are made about the nature of cost function. First, firms produce quality mostly with fixed costs and second, quality is produced by variable costs. Therefore, in the context of a symmetric oligopoly game where each firm has two dimensional strategy set of price and quality, the present paper attempts to answer a question regarding the equivalence of FPESS and Nash equilibrium. In conclusion, whether firms produce quality with fixed costs or variable costs, our results show that Nash equilibrium, FPESS and competitive equilibrium are distinct. Moreover, this paper provide a generalization of evolutionary game setup of Tanaka (2000) where we obtain not the same equilibrium price comparison between Nash and FPESS from the one that attained in Tanaka (2000, proposition 2).

Intertemporal Complementarity and Self-competition between Charge Profiles in Mobile Communication Services: A Case of Endogenous Most Favoured Customer Condition

We analyze competition between mobile operators in a repeated game framework focusing on the durability over time of the offered charge profile. In fact, customers and operators sign a contract that is usually enforced until the former decides to change it. The consequence is that anytime an operator decides to decrease its prices in order to attract new customers, it has to evaluate the negative impact on the old customers revenues, which can change their original charge profile. We underline an intertemporal substitution and a self or internal competition among different charge profiles offered by the same operator over time. In terms of strategical behaviour, we observe a sort of endogenous Most Favoured Customer condition that reduces price competition in oligopoly and generates an allocative inefficiency. In the paper we first formalize this property. Then, as a result, focusing on some Italian evidence, we show its impact on past and present mobile competition.

Organizational strategy and tacit collusion in oligopoly with agency

We study a model that integrates organizational structure and agency withdynamic price competition in oligopoly. Workers in different levels of the organizational structure have asymmetric information and heterogeneous objectives; i.e., there are agency conflicts within the firm. The organizational strategy of the firm is to determinesequentially the decision power relating to price and non-price competition instruments at each level. We examine the equilibrium organizational and competitive strategy of firms in a duopoly, and characterize the extent of noncooperative tacit collusion (with respect to price and non-price competition) that is feasible. We identify two sets of sufficient conditions that guarantee, (i) the monopoly solution is sustainable at any discount factor (rate of impatience of the workers), or (ii) the monopoly solution is not sustainable for any level of the discount factor. Interestingly, tacit collusion may be feasible when either the agency problem is non-existentor very severe; i.e., firm profits in equilibrium may be non-monotone in the extent of the agency conflict. Our analysis indicates that intrafirm learning and agency will have a stronger impact on feasible tacit collusion in markets where non-price competition plays a strong role. Moreover, there is an intimate connection between the firm's organizational strategy and the extent of tacit collusion with the (industry) business cycle.

Buyer Market Structure and R&D Effort: A Simultaneous Equations Model

THE theoretical and empirical investigations of the relationship between market structure and the firm's incentive to invent and innovate have concentrated on the effects of the structure of the supply side of the market. This focus on the supply side originated in Schumpeter's controversial hypothesis that current market power provided the necessary conditions and future market power provided the incentive for technical change (Schumpeter, 1950). This hypothesis stimulated a vast number of theoretical refinements and empirical tests of relations between research and development activity (R&D) and supply side characteristics such as concentration, firm size, and diversification. This literature has been well summarized by Kamien and Schwartz (1975) and Scherer (1980). The analysis of the effects of the buyer market structure on the selling industry conduct and performance has been limited, both theoretically and empirically. Stigler (1964) modeled the effects of the size distribution of buyers on price competition in oligopoly. Telser (1964) devel-, oped a theory of messages in which he suggested that advertising would increase when buyers were many and small. Lustgarten (1975) tested the effects of buyer market structure on price cost margins and advertising and found the relations suggested by Stigler and Telser. Invention and innovation are forms of competition which, like price and advertising, will be affected by both buyer market structure and seller market structure. However, unlike price and advertising competition, there have not been explicit attempts to establish theoretical and empirical relations between buyer market structure and inventive and innovative activity. The effects of buyer market structure on the selling industry's incentive to invent and innovate is relevant to interpreting the effects of seller market structure on this effort. A number of previous studies of the effects of seller market structure on technical change have found that seller concentration may have a slight positive impact on inventive and innovative effort (Kamien and Schwartz, 1975, p. 20). Even this weak relation may be due to not controlling for buyer market structure. If Galbraith's (1952) countervailing power hypothesis is correct (Lustgarten, 1975, p. 128), concentration in the buyer and seller markets may be positively correlated. If buyer market concentration is positively related to inventive and innovative effort in the selling industry, the empirical estimate of the partial effect of seller concentration will be biased upward. This paper investigates the effect of buyer market structure on R&D effort. Section II draws together the literature that is relevant to the issue of the relation between buyer market structure and seller inventive and innovative activity. Section III develops a simultaneous equation model of R&D activity where R&D, advertising and concentration are endogenous variables. Section IV uses data on scientific and engineering inputs to test this model. Section V summarizes these results.