Edgeworth Cycles and Focal Prices: Computational Dynamic Markov Equilibria

48 Pages Posted: 30 Sep 2004

Date Written: September 2004

Abstract

Motivated by the discovery of apparent Edgeworth Cycles in many retail gasoline markets, this paper extends the Maskin & Tirole [1988] theory of Edgeworth Cycles to a wide range of more complicated and realistic settings. Taking a computational approach to search for Markov Perfect Equilibria, I examine models involving duopoly and triopoly, differentiation, capacity constraints, and different sharing rules, discount factors and initial beliefs about price leading behavior. I find Edgeworth Cycles in equilibrium in many scenarios outside the homogenous-good Bertrand mold. Cycle characteristics and average markups depend on the scenario.

JEL Classification: D43, L11, L13

Suggested Citation

Noel, Michael D., Edgeworth Cycles and Focal Prices: Computational Dynamic Markov Equilibria (September 2004). Available at SSRN: https://ssrn.com/abstract=597824 or http://dx.doi.org/10.2139/ssrn.597824

Michael D. Noel (Contact Author)

Texas Tech University ( email )

237 Holden Hall
Box 41014
Lubbock, TX 79407
United States

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