Two firms compete in prices in a market for a homogeneous product. In this marke

Question

Two firms compete in prices in a market for a homogeneous product. In this market there are N > 0 consumers; each buys one unit if the price of the product does not exceed $10, and nothing otherwise. Consumers buy from the firm selling at a lower price. In case both firms charge the same price, assume that N/2 consumers buy from each firm. Assume zero production cost for both firms.

Suppose that the firms set prices simultaneously in a game that is repeated infinitely. Let denote the time- discount parameter. Propose trigger price strategies for both firms yielding the collusive prices of ($10, $10) each period. Calculate the minimal value of that would enforce the trigger price strategies you proposed.

Explanation / Answer

Proposed trigger price strategies for both firms yielding the collusive prices of ($10, $10) each period are as follows:

1. uniform prices

2. a penalty for price discounts

3. advance notice for price changes

4. information exchange

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