Cartel Pricing Dynamics, Price Wars and Cartel Breakdown
AbstractThis paper gives an unified explanation of some of the most widely known facts of the cartel literature: prices gradually rise, then remain constant, there can be price wars and some cartels break down. In this model consumers are loss averse and efficiency of a competitive fringe is not publicly observable. In the best collusive equilibrium, the price expectation can be so low that loss aversion makes consumers not buy at the maximal collusive price: firms then set a lower price that rises in time with consumers’ expectations. This increasing price path is bounded from above by the presence of the fringe. If the fringe sets a low price during a sufficient number of periods, there can be price wars and collusion can eventually break down.
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Bibliographic InfoPaper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 12-309.
Date of creation: May 2012
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-29 (All new papers)
- NEP-BEC-2012-05-29 (Business Economics)
- NEP-COM-2012-05-29 (Industrial Competition)
- NEP-HME-2012-05-29 (Heterodox Microeconomics)
- NEP-IND-2012-05-29 (Industrial Organization)
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