By analysing an infinitely repeated game where unit costs alternate stochastically
between low and high states and where firms follow a price-matching
punishment strategy, we demonstrate that the best collusive prices are rigid
over time when the two cost levels are sufficiently close. This provides game
theoretic support for the results of the kinked demand curve. In contrast to
the kinked demand curve, it also generates predictions regarding the level and
the determinants of the best collusive price, which in turn has implications
for the corresponding collusive profits. The relationships between such price
rigidity and the expected duration of a high-cost phase, the degree of product
differentiation, and the number of firms in the market are also investigated.
Funding
The support of the Economic and Social Research Council (UK) is gratefully acknowledged.
History
School
Business and Economics
Department
Economics
Published in
International Industrial Organization Conference
Pages
1 - 31 (31)
Citation
GARROD, L., 2011. Collusive price rigidity under price-matching punishments. 9th Annual International Industrial Organization Conference, Boston, USA, April 24th-26th 2015, 31pp.
Version
AM (Accepted Manuscript)
Publisher statement
This work is made available according to the conditions of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International (CC BY-NC-ND 4.0) licence. Full details of this licence are available at: https://creativecommons.org/licenses/by-nc-nd/4.0/