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Cartel pricing dynamics with reference-dependent preferences

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  • Manganelli, Anton-Giulio

Abstract

This paper characterizes cartel pricing dynamics when consumers have reference-dependent preferences. Firms have a common discount factor unknown to consumers and a common cost i.i.d. over time. Consumers observe prices over time and update their expectations about firms’ ability to collude, which affects consumers’ price expectations. Reference-dependent preferences make consumers lose utility when the actual price is higher than the expected one, which forces colluding firms to raise prices alongside consumers’ price expectations. This increasing price path is capped by the price arising when consumers are sure that firms collude.

Suggested Citation

  • Manganelli, Anton-Giulio, 2017. "Cartel pricing dynamics with reference-dependent preferences," Economics Letters, Elsevier, vol. 150(C), pages 91-94.
  • Handle: RePEc:eee:ecolet:v:150:y:2017:i:c:p:91-94
    DOI: 10.1016/j.econlet.2016.11.016
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    References listed on IDEAS

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    Cited by:

    1. Manganelli, Anton-Giulio, 2023. "Cartel pricing dynamics and discount factor uncertainty," Finance Research Letters, Elsevier, vol. 56(C).

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    More about this item

    Keywords

    Cartel pricing dynamics; Reference-dependent preference; Discount factor uncertainty;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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