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Cartel Pricing Dynamics, Price Wars and Cartel Breakdown

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  • Manganelli, Anton-Giulio
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    Abstract

    This 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 Info

    Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 12-309.

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    Date of creation: May 2012
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    Handle: RePEc:tse:wpaper:25843

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    1. Thaler, Richard, 1980. "Toward a positive theory of consumer choice," Journal of Economic Behavior & Organization, Elsevier, vol. 1(1), pages 39-60, March.
    2. David Gill & Victoria Prowse, 2011. "A Structural Analysis of Disappointment Aversion in a Real Effort Competition," Discussion Papers 2011001, University of Oxford, Nuffield College.
    3. Haigh, Michael S. & List, John A., 2002. "Do Professional Traders Exhibit Myopic Loss Aversion? An Experimental Analysis," Working Papers 28554, University of Maryland, Department of Agricultural and Resource Economics.
    4. Botond Kőszegi & Paul Heidhues, 2008. "Competition and Price Variation When Consumers Are Loss Averse," American Economic Review, American Economic Association, vol. 98(4), pages 1245-68, September.
    5. Gill, David & Stone, Rebecca, 2010. "Fairness and Desert in Tournaments," MPRA Paper 21322, University Library of Munich, Germany.
    6. John M. Connor, 1998. "What Can We Learn From The Adm Global Price Conspiracies?," Working Papers 98-14, Purdue University, College of Agriculture, Department of Agricultural Economics.
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