Introduction

Economists' concern with the possibility that firm conduct might allow businesses to collect economic profit over the long run goes back at least to Smith's (1937, p. 128) oft-quoted observation that

From that time forward, industrial economists have analysed structure–conduct–performance relationships and offered advice to policy makers on the kinds of rules for business behaviour that are conducive to good market performance. Consistent with this advice, competition policy for most market economies declines to enforce collusive agreements and prohibits a variety of types of conduct thought to facilitate collusive outcomes.

Although the infusion of industrial economics by game theory has been marked by great technical advances, this precision is of limited use for the purpose of advising policy makers about rules for business behaviour. In the kind of imperfectly competitive market that characterizes major industries in modern economies, the best equilibrium market performance obtainable is that of the Nash equilibrium of a nonrepeated game (henceforth, for conciseness, we will refer to this as the static Nash equilibrium). Game-theoretic models of markets as repeated games are plagued by a multiplicity of equilibria, many of which yield firms greater profit than they would earn in static Nash equilibrium.