Guaranteed lowest prices

We examine the effect of guaranteed lowest price clauses (G.L.P.). First, we correct the proof of Logan and Lutter’s main result that it is the unique equilibrium outcome for firms adopting G.L.P. to charge collusive prices in a simultaneous pricing game, if one uses the trembling-hand perfect equilibrium as the solution concept. Second, we extend their argument to a sequential pricing game in which one firm chooses its price before the other, given that both firms adopt G.L.P. We show that collusive prices is the unique equilibrium outcome in this game even without resorting to any stringent refinement like the trembling-hand perfect equilibrium

Collusion · Economics · Equilibrium selection · Game theory · Markov perfect equilibrium · Mathematical economics · Microeconomics · Nash equilibrium · Repeated game · Sequential equilibrium · Subgame perfect equilibrium · Consumer Market Behavior and Pricing · Economic theories and models · Merger and Competition Analysis