Oligopoly game: Price makers meet price takers

Publication Type:
Journal Article
Journal of Economic Dynamics and Control, 2018, 91 pp. 84 - 103
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© 2018 Elsevier B.V. The paper studies an oligopoly game, where firms can choose between price-taking and price-making strategies. On a mixed market price takers are always better off than price makers, though the profits of both types decline in the number of price takers. We investigate and confront two possibilities of firms’ decisions about their types: forward-looking equilibrium reasoning and backward-looking individual learning. We find that the Cournot outcome is the only equilibrium prediction and it is learnable if firms are sufficiently sensitive to profit differences. However, with a larger number of firms, a unilateral deviation from Cournot behavior becomes profitable. Under learning this incentive creates a space for permanent oscillations over different markets with a positive but low number of price takers.
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