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Relaxing price competition through product differentiation. (English) Zbl 0537.90015

The paper considers an industry under monopolistic competition and employs, in the context of a three-stage non-cooperative game, the concept of perfect equilibrium (recently introduced and developed by R. Selten) to characterize its equilibrium. In the first stage a firm decides whether to enter or not to enter the industry. Then, in the second stage, it chooses the quality of its product and in the final stage of the game it sets its price. A perfect equilibrium requires that at the end of each stage the remaining part of the strategy forms for the remaining game a Nash equilibrium. The authors show that within the context of their model the only perfect equilibrium is one with only two firms which produce distinct quality products and make positive profits. The paper is recommended to those interested in the foundation of monopolistic competition.
Reviewer: D.Glycopantis

MSC:

91B24 Microeconomic theory (price theory and economic markets)
91A40 Other game-theoretic models
91A20 Multistage and repeated games
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