Journal Of The Econometric Society

An International Society for the Advancement of Economic
Theory in its Relation to Statistics and Mathematics

Edited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262

Econometrica: May, 1990, Volume 58, Issue 3

Intertemporal Price Competition<637:IPC>2.0.CO;2-#
p. 637-659

Jonathan Eaton, Maxim Engers

We develop a model of alternating price competition between firms selling differentiated products to nonhomogeneous consumers. Subgame perfect equilibria exist that support quite collusive prices even though each firm's price depends only upon its rival's current price. We find two types of equilibria. One, which we call "disciplined," arise when products are close substitutes. The other, which we call "spontaneous," emerge when products are more differentiated. In disciplined equilibria the steady-state price is enforced by the implicit threat to respond to a price cut with further price cutting. In spontaneous equilibria no such threat is needed. Consumers in the smaller market tend to pay a higher price, as do consumers in the market served by the more efficient firm. The price supported by a disciplined equilibrium is greater the less differentiated are the products.

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