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Collusion, Fluctuating Demand, and Price Rigidity

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  • Makoto Hanazono

    ()
    (Institute of Economic Research, Kyoto University)

  • Huanxing Yang

    ()
    (Department of Economics, University of Pennsylvania)

Abstract

We study an infinitely repeated Bertrand game in which an i.i.d. demand shock occures in each period. Each firm recieves a private signal about the demand shock at the beginning of each period. At the end of each period, information about both the underlying demand shock and the rival's prices becomes public. A firm's pricing schedule can be either a sorting scheme, in which its price depends on its private signal, or a price-rigidity scheme, in which the firm charges the same price regardless of its private signal. We consider the optiomal symmetric perfect public equilibrium (SPPE). The optimal SPPE consists of a profile of price-rigidity schemes if the accuracy of the private signals is low. Moreover, the lower the variance of the demand shock, the more likely that a price-rigidity scheme is optimal. These results contribute to our understanding of which industries, and under what conditions, should exhibit rigid prices.

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Bibliographic Info

Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 589.

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Length: 29 pages
Date of creation: May 2004
Date of revision:
Handle: RePEc:kyo:wpaper:589

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Keywords: Collusion; private information; optimal pricing; price rigidity;

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Cited by:
  1. Garrod, Luke, 2012. "Collusive price rigidity under price-matching punishments," International Journal of Industrial Organization, Elsevier, vol. 30(5), pages 471-482.
  2. Gea Myoung Lee, 2008. "Optimal Collusion with Internal Contracting," Working Papers 08-2008, Singapore Management University, School of Economics.
  3. Joseph E. Harrington, Jr., 2012. "A Theory of Tacit Collusion," Economics Working Paper Archive 588, The Johns Hopkins University,Department of Economics.
  4. Gerlach, Heiko, 2009. "Stochastic market sharing, partial communication and collusion," International Journal of Industrial Organization, Elsevier, vol. 27(6), pages 655-666, November.
  5. Joseph E. Harrington, Jr, 2005. "Detecting Cartels," Economics Working Paper Archive 526, The Johns Hopkins University,Department of Economics.
  6. Harrington, Joseph E. & Zhao, Wei, 2012. "Signaling and tacit collusion in an infinitely repeated Prisoners’ Dilemma," Mathematical Social Sciences, Elsevier, vol. 64(3), pages 277-289.
  7. Joseph E. Harrington, Jr. & Wei Zhao, 2010. "Signaling and Tacit Collusion in an Infinitely Repeated Prisoners' Dilemma," Economics Working Paper Archive 559, The Johns Hopkins University,Department of Economics.
  8. Joseph E. Harrington, Jr. & Wei Zhao, 2012. "Signaling and Tacit Collusion in an Infinitely Repeated Prisoners' Dilemma," Economics Working Paper Archive 587, The Johns Hopkins University,Department of Economics.

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