Intentional Price Wars on the Equilibrium Path

Posted by D. Daniel Sokol

Pot Erik, Peeters Ronald, Peters Hans, and Vermeulen Dries (all Department of Quantitative Economics, Maastricht University) analyze Intentional Price Wars on the Equilibrium Path.

ABSTRACT: In this paper we study the effect of information on the occurrence of intentional price wars on the equilibrium path. An episode of low prices is an intentional price war if it follows a period of high prices which was ended intentionally by one of the firms in the market (the price war leader). We show that for intentional price wars to exist on the equilibrium path, two elements are necessary regarding the information on which the firms base their decisions: (1) interperiod dynamics and (2) informational asymmetries. We illustrate this by means of a repeated price-setting game in which market shares fluctuate. Firms learn about the market share realizations at the beginning of each period. We show that intentional price wars on the equilibrium path are possible when firms have private information about their market share. When market shares are public information, we either see collusive price adjustment or episodes of! low prices that do not classify as an intentional price war.