FEEM working papers "Note di lavoro"
2021.09
Date: 30/3/2021

Myopic Oligopoly Pricing


Authors:

Iwan Bos (Maastricht University); Marco A. Marini (Sapienza University of Rome); Riccardo D. Saulle (University of Padova)

JEL n.: C72, D43, L13
Keywords: Behavioral IO, Bounded Rationality, Capacity Constraints, Oligopoly Pricing, Myopic Stable Set

Abstract

This paper examines capacity-constrained oligopoly pricing with sellers who seek myopic improvements. We employ the Myopic Stable Set stability concept and establish the existence of a unique pure-strategy price solution for any given level of capacity. This solution is shown to coincide with the set of pure-strategy Nash equilibria when capacities are large or small. For an intermediate range of capacities, it predicts a price interval that includes the mixed-strategy support. This stability concept thus encompasses all Nash equilibria and offers a pure-strategy solution when there is none in Nash terms. In particular, it provides a behavioral rationale for different types of pricing dynamics, including real-world economic phenomena such as Edgeworth-like price cycles, price dispersion and supply shortages.

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Suggested citation: I. Bos, M. A. Marini, R. D. Saulle, (2021), 'Myopic Oligopoly Pricing', Nota di Lavoro 9.2021, Milano, Italy: Fondazione Eni Enrico Mattei

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