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Dynamic Models of Oligopoly by J. Tirole, D. Fudenberg

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5. PRICE WARS AND TACIT COLLUSION

5a. The supergame approach

This section discusses two recent modifications of the supergame model of implicit collusion in oligopolies. Green and Porter [42] and Porter [72] assume that firms cannot directly observe the actions of their rivals, and that the market demand function is subject to random i.i.d. unobservable shocks. Because of the shock, firms can never be certain whether an unexpectedly bad outcome is due to some rival’s “cheating.” The noise thus reduces the extent to which the firms can collude. Brock and Scheinkman [12] study a price-setting supergame with capacity constraints. They assume that each firm has an exogeneously given capacity, and conclude that the extent of collusion depends non-monotonically ...

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