Oligopoly dynamic pricing: A repeated game with incomplete information

Abstract

We consider an oligopoly dynamic pricing problem where the demand model is unknown and the sellers have different marginal costs. We formulate the problem as a repeated game with incomplete information. We develop a dynamic pricing strategy that leads to a Pareto-efficient and subgame-perfect equilibrium and offers a bounded regret over an infinite horizon, where regret is defined as the expected cumulative profit loss as compared to the ideal scenario with a known demand model. The resulting equilibrium also reveals a spontaneous collusion among a subset of sellers due to the difference in marginal costs among the sellers.