Thursday, July 26, 2007

The Oligopolistic Pricing Problem - A Suggested Price Freeze Remedy

Posted by D. Daniel Sokol

Guy Sagi of Netanya Academic College, Hebrew University School of Law has a new paper out -- The Oligopolistic Pricing Problem - A Suggested Price Freeze Remedy.

ABSTRACT: In this paper I set forth an antitrust remedy for the oligopolistic pricing problem. Oligopoly pricing resembles a repeated prisoners' dilemma game. Each firm has an incentive to moderately lower its price and thus increase its sales at its competitors' expense. However, each firm knows that its rivals would promptly discover such deviation and follow suit shortly. I therefore propose the implementation of a price freeze scheme in oligopoly markets by which an oligopolist that significantly lowers its price would freeze its rivals' prices at their previously higher oligopoly level for a defined period of time. A firm that decides to deviate from the previous oligopoly price and thus activates the price freeze could earn a significant higher payoff than its competitors. The deviating firm will win large share of the market, if not all of it, at the expense of the other firms. This price freeze scheme, as I will demonstrate, would drive prices downward and create an incentive for oligopolists to set ax ante lower prices. Since in most cases the suggested price freeze will drive prices down, ex ante, without actual activations of the price freeze, the suggested scheme is expected to perform as an "invisible" remedy. Therefore, any potential problems and inefficiencies associated with an implementation of a price freeze should be considerably discounted.

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