INTRODUCTION TO INDUSTRIAL ORGANIZATION by Unknown

Author:Unknown
Language: eng
Format: epub
Published: 2021-06-19T16:00:00+00:00

(Short-run monopoly profits plus zero future profits.) The condition that the proposed strategies form an equilibrium is then that V ≥ V′. Pulling (9.2) and (9.3) together, we get:

or simply:

In words: if the discount factor is sufficiently high, then there exists a Nash equilibrium of the repeated game whereby firms set monopoly price in every period under the “threat” that, if any firm ever deviates from this price level, then both firms revert to pricing at marginal cost level forever.

■ THE DISCOUNT FACTOR. As mentioned earlier, the discount factor measures how much $1 one period into the future is worth compared to $1 now. Normally, 0 < δ < 1. There are several reasons why δ < 1. One is the opportunity cost of time: given one period of time, an investor might use $1 to gain $(1 + r) next period, where r is the interest rate per period. In this sense, we would compute δ as:

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