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A Dynamic Oligopoly with Collusion and Price Wars

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  • Chaim Fershtman
  • Ariel Pakes

Abstract

We provide a collusive framework with heterogeneity among firms, investment, entry, and exit. It is a symmetric-information model in which it is hard to sustain collusion when there is an active firm that is likely to exit in the near future. Numerical analysis is used to compare a collusive to a noncollusive environment. Only the collusive industry generates price wars. Also, the collusive industry offers both more and higher-quality products to consumers, albeit often at a higher price. The positive effect of collusion on variety and quality more than compensates for the negative effect of collusive prices, so that consumer surplus is larger with collusion.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 31 (2000)
Issue (Month): 2 (Summer)
Pages: 207-236

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Handle: RePEc:rje:randje:v:31:y:2000:i:summer:p:207-236

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References

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  1. Edward J Green & Robert H Porter, 1997. "Noncooperative Collusion Under Imperfect Price Information," Levine's Working Paper Archive 1147, David K. Levine.
  2. Ericson, Richard & Pakes, Ariel, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Wiley Blackwell, vol. 62(1), pages 53-82, January.
  3. Kandori, Michihiro, 1991. "Correlated Demand Shocks and Price Wars during Booms," Review of Economic Studies, Wiley Blackwell, vol. 58(1), pages 171-80, January.
  4. Caplin, Andrew & Nalebuff, Barry, 1991. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Econometrica, Econometric Society, vol. 59(1), pages 25-59, January.
  5. Porter, Robert H., 1983. "Optimal cartel trigger price strategies," Journal of Economic Theory, Elsevier, vol. 29(2), pages 313-338, April.
  6. Abreu, Dilip, 1986. "Extremal equilibria of oligopolistic supergames," Journal of Economic Theory, Elsevier, vol. 39(1), pages 191-225, June.
  7. Eric Maskin & Jean Tirole, 1997. "Markov Perfect Equilibrium, I: Observable Actions," Harvard Institute of Economic Research Working Papers 1799, Harvard - Institute of Economic Research.
  8. Rubinstein, Ariel, 1979. "Equilibrium in supergames with the overtaking criterion," Journal of Economic Theory, Elsevier, vol. 21(1), pages 1-9, August.
  9. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
  10. Schmalensee, Richard, 1987. "Competitive advantage and collusive optima," International Journal of Industrial Organization, Elsevier, vol. 5(4), pages 351-367.
  11. Kyle Bagwell & Robert W. Staiger, 1995. "Collusion over the Business Cycle," NBER Working Papers 5056, National Bureau of Economic Research, Inc.
  12. Fershtman, Chaim & Gandal, Neil, 1994. "Disadvantageous semicollusion," International Journal of Industrial Organization, Elsevier, vol. 12(2), pages 141-154, June.
  13. Fudenberg, D. & Levine, D.K. & Maskin, E., 1989. "The Folk Theorem With Inperfect Public Information," Working papers 523, Massachusetts Institute of Technology (MIT), Department of Economics.
  14. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June.
  15. Harrington, Joseph Jr., 1989. "Collusion among asymmetric firms: The case of different discount factors," International Journal of Industrial Organization, Elsevier, vol. 7(2), pages 289-307, June.
  16. Abreu, Dilip & Pearce, David & Stacchetti, Ennio, 1986. "Optimal cartel equilibria with imperfect monitoring," Journal of Economic Theory, Elsevier, vol. 39(1), pages 251-269, June.
  17. Friedman, James W, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Wiley Blackwell, vol. 38(113), pages 1-12, January.
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Citations

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Cited by:
  1. Luis Cabral, 2014. "We're Number 1: Price Wars for Market Share Leadership," Working Papers 14-01, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. Asker, John, 2010. "Leniency and post-cartel market conduct: Preliminary evidence from parcel tanker shipping," International Journal of Industrial Organization, Elsevier, vol. 28(4), pages 407-414, July.
  3. Ronald Goettler & Brett Gordon, 2014. "Competition and product innovation in dynamic oligopoly," Quantitative Marketing and Economics, Springer, vol. 12(1), pages 1-42, March.
  4. Kano, Kazuko, 2013. "Menu costs and dynamic duopoly," International Journal of Industrial Organization, Elsevier, vol. 31(1), pages 102-118.
  5. David S. Evans & Michael Salinger, 2004. "An Empirical Analysis of Bundling and Tying: Over-the-Counter Pain Relief and Cold Medicines," CESifo Working Paper Series 1297, CESifo Group Munich.
  6. Hongbin Cai & Uday Rajan, 2005. "Incentive Compatible Collusion and Investment," Annals of Economics and Finance, Society for AEF, vol. 6(1), pages 37-52, May.
  7. Ciliberto, Federico & Williams, Jonathan, 2010. "Does Multimarket Contact Facilitate Tacit Collusion? Inference on Conjectural Parameters in the Airline Industry," MPRA Paper 24888, University Library of Munich, Germany.
  8. David S. Evans & Michael Salinger, 2005. "Curing Sinus Headaches and Tying Law: An Empirical Analysis of Bundling Decongestants and Pain Relievers," CESifo Working Paper Series 1519, CESifo Group Munich.
  9. Christian Bayer, 2004. "The Other Side of Limited Liability: Predatory Behavior and Investment Timing," Industrial Organization 0407001, EconWPA.
  10. Compte, Olivier & Jenny, Frederic & Rey, Patrick, 2002. "Capacity constraints, mergers and collusion," European Economic Review, Elsevier, vol. 46(1), pages 1-29, January.
  11. Bettina Becker, 2013. "The Determinants of R&D Investment: A Survey of the Empirical Research," Discussion Paper Series 2013_09, Department of Economics, Loughborough University, revised Sep 2013.

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