Predation Under Perfect Information

In an oligopoly configuration characterized by high barriers to (re-)entry, a finite horizon, perfect information about demand and costs and the presence of three identical firms, we show that two of them (the predators) can choose to charge an initial price that is so low that the third (the prey) decides to exit immediately, after which the predators can enjoy higher profits, even if they do not raise their price. Predatory prices are thus observed on the equilibrium path and the predators end up earning more than in the best Bertrand (or even, collusive) equilibrium with three firms.predation;predatory pricing;collusion;dynamic game;Bertrand competition

Exclusion Through Speculation

Many commodities are traded on both a spot market and a derivative market. We show that an incumbent producer may use financial derivatives to extract rent from a potential entrant. The incumbent can indeed sell insurance to a large buyer to commit himself to compete aggressively in the spot market and drive the price down for the entrant. It can do so by selling derivatives for more than his expected production level, i.e. by taking a speculative position. This comes at the cost of inefficiently deterring entry.exclusion;monopolization;contracts;financial contracts;derivatives;risk aversion;speculation

Exclusivity as Inefficient Insurance

It is well established that an incumbent firm may use exclusivity contracts so as to monopolize an industry or deter entry. Such an anticompetitive practice could be tolerated if it were associated with sufficiently large efficiency gains, e.g. insuring buyers against price volatility. In this paper we study the trade-off between positive effects (risk sharing) and negative effects (exclusion) of exclusivity contracts. We revisit the seminal model of Aghion and Bolton (1987) under risk-aversion and show that although exclusivity contracts induce optimal risk-sharing, they can be used not only to deter the entry of a more efficient rival on the product market but also to crowd out financial investors willing to insure the buyer at competitive rates. We further show that in a world without financial investors, purely financial bilateral instruments, such as forward contracts, achieve optimal risk sharing without distorting product market outcomes. Thus, there is no room for an insurance defense of exclusivity contracts.exclusivity;contracts;monopolization;risk-aversion;risk-sharing;damages

Robustness to Strategic Uncertainty (Revision of DP 2010-70)

We model a player’s uncertainty about other players’ strategy choices as smooth probability distributions over their strategy sets. We call a strategy profile (strictly) robust to strategic uncertainty if it is the limit, as uncertainty vanishes, of some sequence (all sequences) of strategy profiles, in each of which every player’s strategy is optimal under under his or her uncertainty about the others. We derive general properties of such robustness, and apply the definition to Bertrand competition games and the Nash demand game, games that admit infinitely many Nash equilibria. We show that our robustness criterion selects a unique Nash equilibrium in the Bertrand games, and that this agrees with recent experimental findings. For the Nash demand game, we show that the less uncertain party obtains the bigger share.Nash equilibrium;refinement;strategic uncertainty;price competition;Bertrand competition;bargaining;Nash demand game

Collusion in Experimental Bertrand Duopolies with Convex Costs: The Role of Information and Cost Asymmetry

We report the results of a series of experimental Bertrand duopolies where firms have convex costs. Theoretically these duopolies are characterized by a multiplicity of Nash equilibria. Using a 2x2 design, we analyze price choices in symmetric and asymmetric markets under 2 information conditions: complete versus incomplete information about profits. We find that information has no effect in symmetric markets with respect to market prices and the time it takes for markets to stabilize. However, in asymmetric markets, complete information leads to higher average market prices and quicker convergence of price choices.Bertrand competition;convex costs;collusion;coordination;experimental economics

Predation Under Perfect Information

In an oligopoly configuration characterized by high barriers to (re-)entry, a finite horizon, perfect information about demand and costs and the presence of three identical firms, we show that two of them (the predators) can choose to charge an initial price that is so low that the third (the prey) decides to exit immediately, after which the predators can enjoy higher profits, even if they do not raise their price. Predatory prices are thus observed on the equilibrium path and the predators end up earning more than in the best Bertrand (or even, collusive) equilibrium with three firms.

Exclusive Quality

In the case of vertically differentiated products, Bertrand competition at the retail level does not prevent an incumbent upstream firm from using exclusivity contracts to deter the entry of a more efficient rival, contrary to what happens in the homogenous product case. Indeed, because of differentiation, the incumbent’s inferior product is not eliminated upon entry. As a result, a retailer who considers rejecting the exclusivity clause expects to earn much less than the incumbent’s monopoly rents. Thus, in equilibrium, the incumbent can offer high enough an upfront payment to induce all retailers to sign on the contract and achieve exclusion.vertical differentiation;exclusive dealing;contracts;naked exclusion;monopolization

Collusion in Experimental Bertrand Duopolies with Convex Costs:The Role of Information and Cost Asymmetry

We report the results of a series of experimental Bertrand duopolies where firms have convex costs. Theoretically these duopolies are characterized by a multiplicity of Nash equilibria. Using a 2x2 design, we analyze price choices in symmetric and asymmetric markets under 2 information conditions: complete versus incomplete information about profits. We find that information has no effect in symmetric markets with respect to market prices and the time it takes for markets to stabilize. However, in asymmetric markets, complete information leads to higher average market prices and quicker convergence of price choices.