Myopic Oligopoly Pricing
Iwan Bos, Maastricht University; Marco A. Marini, Sapienza University of Rome; Riccardo D. Saulle, University of Padova
C72, D43, L13
Bounded Rationality, Capacity Constraints, Mergers, Myopic Stable Set, Oligopoly Pricing, Supply Shortages
This paper examines capacity-constrained oligopoly pricing with sellers who seek myopic improvements. We employ the Myopic Stable Set solution 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 mixedstrategy support. This stability concept thus encompasses all Nash equilibria and offers a pure-strategy solution when there is none in Nash terms. It particularly provides a behavioral rationale for different pricing patterns, including Edgeworth price cycles and states of hyper-competition with supply shortages. We also analyze the impact of a change in firm size distribution. A merger among the biggest firms may lead to more price dispersion as it increases the maximum and decreases the minimum myopically stable price.
Suggested citation: I. Bos, M. A. Marini, R. D. Saulle (2021), ‘Myopic Oligopoly Pricing’, Nota di Lavoro 32.2021, Milano, Italy: Fondazione Eni Enrico Mattei