Enterprise Software

Costly Renegotiation In Repeated Bertrand Games

Date Added: Mar 2010
Format: PDF

This paper extends the concept of Weak Renegotiation-Proof equilibrium (WRP) to allow for costly renegotiation and shows that even small renegotiation costs can have dramatic effects on the set of equilibrium. More specifically, the paper analyzes the infinitely repeated Bertrand game. It is shown that for every level of renegotiation cost there exists a discount factor such that any collusive pro t can be supported as an equilibrium outcome. Hence, any arbitrary small renegotiation cost will suffice to facilitate collusive outcomes for sufficiently patient firms.