Price Competition or Tacit Collusion

Posted by D. Daniel Sokol

Makoto Yano (Institute of Economic Research, Kyoto University) and Takashi Komatsubara (Institute of Economic Research, Kyoto University) ask Price Competition or Tacit Collusion.

ABSTRACT: Every now and then, we observe a fierce price war in a real world market, through which competing firms end up with a Bertrand-like price competition equilibrium. Despite this, very little has been known in the existing literature as to why a price competition market is formed. We address this question in the context of a choice between engaging in price competition and holding a price leader. Focusing on a duopoly market, we demonstrate that if supply is tight relative to demand, and if the cost differential between firms is reasonably large, a price competition market is formed non-cooperatively.