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Costly renegotiation in repeated Bertand games

In English

Författare

Summary, in English

This paper extends the concept of weak renegotiation-proof equilibrium (WRP) to allow for costly renegotiation and shows that even small renegotiation costs can have dramatic effects on the set of equilibria. More specifically, the paper analyzes the infinitely repeated Bertrand game. It is shown that for every level of renegotiation cost, there exists a discount factor such that any collusive profit can be supported as an equilibrium outcome. Hence, any arbitrary small renegotiation cost will suffice to facilitate collusive outcomes for sufficiently patient firms. This result stands in stark contrast to the unique pure strategy WRP equilibrium without renegotiation costs, which implies marginal-cost pricing in every period. Moreover, in comparison to the findings of McCutcheon (1997), who states that renegotiation costs have to be substantial to facilitate collusion, this result points to a quite different conclusion.

Publiceringsår

2010

Språk

Engelska

Publikation/Tidskrift/Serie

Contributions to Theoretical Economics

Volym

10

Issue

1, Article 51

Dokumenttyp

Artikel i tidskrift

Förlag

Berkeley Electronic Press

Ämne

  • Economics

Status

Published

ISBN/ISSN/Övrigt

  • ISSN: 1534-5971