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Costly renegotiation in repeated Bertand games

Andersson, Ola and Wengström, Erik LU (2010) In Contributions to Theoretical Economics 10(1, Article 51).
Abstract
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... (More)
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. (Less)
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author
organization
publishing date
type
Contribution to journal
publication status
published
subject
in
Contributions to Theoretical Economics
volume
10
issue
1, Article 51
publisher
The Berkeley Electronic Press
ISSN
1534-5971
language
English
LU publication?
yes
id
0fb54acb-aa3d-4747-b48f-8f141a511ee0 (old id 1713243)
date added to LUP
2010-11-11 10:22:17
date last changed
2018-05-29 12:13:22
@article{0fb54acb-aa3d-4747-b48f-8f141a511ee0,
  abstract     = {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.},
  author       = {Andersson, Ola and Wengström, Erik},
  issn         = {1534-5971},
  language     = {eng},
  number       = {1, Article 51},
  publisher    = {The Berkeley Electronic Press},
  series       = {Contributions to Theoretical Economics},
  title        = {Costly renegotiation in repeated Bertand games},
  volume       = {10},
  year         = {2010},
}