A One-Shot Pricing Game General Mills Kellogg’s

Equilibrium to the One-Shot Pricing Game Each firm will have no profit incentive to deviate from the “Nash Equilibrium”. Each firm has the best pricing strategy with respect to maximize the profits General Mills Kellogg’s

Suppose General Mills adopts this trigger strategy. Kellogg’s profits?  Cooperate = /(1+i) + 12/(1+i) /(1+i) 3 + … = /i General Mills Kellogg’s Value of a perpetuity of $12 paid at the end of every year  Cheat = 20 +2/(1+i) + 2/(1+i) 2 + 2/(1+i) 3 + … = /i

Benefits & Costs of Cheating  Cheat -  Cooperate = /i –8 = Immediate Benefit ( today) –10/i = PV of Future Cost ( forever after) If Immediate Benefit - PV of Future Cost > 0 – Pays to “cheat”. If Immediate Benefit - PV of Future Cost  0 –Doesn’t pay to “cheat”. General Mills Kellogg’s

Vitamins cartel targeted nations without active cartel enforcement Continent Nations without active enforcement Nations with active enforcement Western Europe52.1%17.4% Latin America and Caribbean 53.0%38.1% Asia40.1%-13.9%