Dynamic Countervailing Power Under Public and Private Monitoring
University College London
CEPR Discussion Paper No. DP9526
We examine buyer strategic power in the model of dynamic Bertrand-Edgeworth competition. Two sellers with a limited inventory sell to a single buyer, who has a consumption opportunity in each period. The market power of the sellers is offset by the strategic power of the buyer. By not consuming in any period, the buyer can destroy a unit of demand, thereby intensifying future price competition. If transactions are publicly observed, we find that that a strategic buyer can do significantly better than non-strategic buyers; strategic power may also give rise to inefficiencies. However, if an agent only perfectly observes those transactions in which he is directly involved, and imperfectly observes other transactions, the strategic power of the buyer is reduced, and in some cases, may be completely eliminated. This highlights the sharp discontinuity between the equilibrium outcomes between perfect and imperfect monitoring.
Number of Pages in PDF File: 32
Keywords: Bertrand-Edgeworth competition, dynamic games, imperfect monitoring, strategic buyer
JEL Classification: D43, D92
Date posted: July 2, 2013