Pareto-Nash Allocations under Incomplete Information: A Model of Stable Optima

Abstract

Prior literature on two-firm two-market and two-stage extended dynamic models has introduced what Guth (2016) succinctly terms a social dilemma. A state in which conglomerate firms competing in a Bertrand duopoly consider jointly optimizing profits under a tacit self-enforcing agreement to deter market entry. This theoretical article reinterprets the social dilemma highlighted by Guth (2016) not only in the context of allocation but also through the lens of competition where entry must legally be permitted even if cooperative signalling would otherwise sustain joint profitability. This study explores the significance of a sufficiency condition on each firm's non-instantaneous reaction function requiring the maintenance of a stable long-run equilibrium through retaliative restraint characterized by either two negative eigenvalues or a saddle-path trajectory.