March 2021 Working Paper 009.2021

The ‘deterrence of external deviations’ requirement holds when none of the sellers gains by moving from a price profile in the MSS to a price profile outside the MSS. [...] To capture the better-reply dynamics that can be generated by the firms, we define the -fold iteration f ppq as the subset of P that contains all the price profiles obtained by a composition of dominance correspondences of length P N. [...] In words, the hyper-competitive price is the lowest price for which a firm obtains the same profit as when it sets the iso-profit price of the largest seller, given that this iso-profit price is the strictly highest price in themarket. [...] This, in turn, creates a downward pressure on the hyper-competitive price since, by definition, this is the lowest price for which a seller obtains the same profit as when it sets the iso-profit price of the biggest market player. [...] Notice that k1 has a positive impact on the size of the MSS since it reduces the lower bounds while increasing the upper bounds (Proposition 3).18 Also, and in contrast to the previous case, k2 has a positive impact on the size of the MSS by reducing the lower bounds.