BERTRAND COMPETITION WITH INTERTEMPORAL DEMAND

Abstract. The text-book model of dynamic oligopolistic competition views firms as players in a repeated game, where the demand function is the same in every period. We argue that this is not a satisfactory model of the de-mand side if consumers can make intertemporal substitution between periods. Each period then leaves some residual demand to future periods, and pricing in one period may affect consumers ’ expectations of future prices. In particular, consumers who observe a deviation from collusive firm behavior may antici-pate an ensuing punishment phase with lower prices and therefore postpone purchases. In a model that incorporates these two additional elements, the interaction between the firms no longer constitutes a repeated game. We here develop a simple model of intertemporal demand in a recurrent market setting, and use it to analyze collusive pricing under Bertrand competition. The more patient and forward-looking consumers are, the easier it is for firms to collude against them. ∗This is a revised version of WP 493 at the Stockholm School of Economics. The authors ar