nH = (pH - c) *(pH), TT^ = (pL - c) axipj. In order for the strategies described to constitute an equilibrium, a firm should not find it profitable to deviate in either high or low states. If a firm deviates in a high state, it can undercut the rival by a small c and collect Tt . The deviator will be punished by a reversion to Bertrand

competition and will collect zero profits thereafter. If the firm does not deviate, it collects n^J2 in the current period, and its expected present value of future profits is

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