Pricing and coordination: Strategically stable equilibria

Abstract This paper investigates a class of two-period games in which the first-period interactions have the features of a prisoner's dilemma game and the second-period interactions have the features of a coordination game. This class of games seems relevant to problems of industrial organization where firms not only compete in prices but also have to coordinate in some other dimensions. We find that equilibrium outcomes that we can reject on intuitive grounds are not generated by elements of stable sets a la Kohlberg and Mertens.