Collusion, Fluctuating Demand, and Price Rigidity

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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)

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Huanxing Yang

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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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
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Handle: RePEc:kyo:wpaper:589

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Article
- Makoto Hanazono & Huanxing Yang, 2007. "Collusion, Fluctuating Demand, And Price Rigidity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(2), pages 483-515, 05. [Downloadable!] (restricted)

Find related papers by JEL classification:
C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information

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Joseph E. Harrington, Jr, 2005. "Detecting Cartels," Economics Working Paper Archive 526, The Johns Hopkins University,Department of Economics. [Downloadable!]

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