Sequential Moves and Tacit Collusion: Reaction-Function Cycles in a Finite Pricing Duopoly

This paper analyzes a finite horizon, sequential move pricing duopoly, restricting attention to Markov strategies. The solution yields stationary patterns, independent of initial conditions, where the reaction-functions follow cycles of three periods. The market price never settles down, and is at all times strictly above marginal cost. Long-run average industry profits are approximately 5 6 of the monopoly level. These results demonstrate that neither a long horizon nor non-Markovian strategies are required for persistent profits in dynamic price-competition games. Journal of Economic Literature Classification Numbers: C73, D43, L13 1999 Academic Press