2002 Reports

Bertrand competition with intertemporal demand

Dutta, Prajit Kumar; Matros, Alexander; Weibull, Jorgen W.

In the text-book model of dynamic Bertrand competition, competing firms meet the same demand function every period. This is not a satisfactory model of the demand side if consumers can make intertemporal substitution between periods. Each period then leaves some residual demand to future periods, and consumers who observe price under-cutting may correctly anticipate an ensuing price war and therefore postpone their purchases. Such intertemporal substitution affects the profit to a deviating firm. Accordingly, the interaction between the firms no longer constitutes a repeated game, and hence falls outside the domain of the usual Folk theorems. We analyze collusive pricing in such situations, and study cases when consumers have perfect and imperfect foresight, and when they are more or less patient than the firms. It turns out that collusion against patient and forwardlooking consumers is easier to sustain than collusion in the text-book model.