ESRC Centre for Economic Learning and Social Evolution
Abstract
In the text-book model of dynamic Bertrand competition,
competing firms meet the same demand function every period. This is not a
satisfactory model of the demand side if consumers can make intertemporal
substitution between periods. Each period then leaves some residual demand
to future periods, and consumers who observe price under-cutting may correctly
anticipate an ensuing price war and therefore postpone their purchases.
Accordingly, the interaction between the firms no longer constitutes a repeated
game, and hence falls outside the domain of the usual Folk theorems.
We analyze collusive pricing in such situations, and study cases when consumers
have perfect and imperfect foresight and varying degrees of patience.
It turns out that collusion against patient and forward-looking consumers is
easier to sustain than collusion in the text-book model
