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Collusive Price Rigidity under Price-Matching Punishments

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  • Luke Garrod

    (Centre for Competition Policy, University of East Anglia)

Abstract

By analysing an infinitely repeated game where unit costs alternate stochastically between low and high states and where firms follow a price-matching punishment strategy, we demonstrate that the best collusive prices are rigid over time when the two cost levels are sufficiently close. This provides game theoretic support for the results of the kinked demand curve. In contrast to the kinked demand curve it also generates predictions regarding the level and the determinants of the best collusive price, which in turn has implications for the corresponding collusive profits. The relationships between such price rigidity and the expected duration of a high-cost phase, the degree of product differentiation, and the number of firms in the market are also investigated.

Suggested Citation

  • Luke Garrod, 2011. "Collusive Price Rigidity under Price-Matching Punishments," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2011-14, Centre for Competition Policy, University of East Anglia, Norwich, UK..
    • Handle: RePEc:uea:ueaccp:2011_14
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    References listed on IDEAS

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    Cited by:

    1. Andreoli-Versbach, Patrick & Franck, Jens-Uwe, 2013. "Actions Speak Louder than Words: Econometric Evidence to Target Tacit Collusion in Oligopolistic Markets," Discussion Papers in Economics 16179, University of Munich, Department of Economics.
    2. Wright, Julian, 2013. "Punishment strategies in repeated games: Evidence from experimental markets," Games and Economic Behavior, Elsevier, vol. 82(C), pages 91-102.
    3. Andreoli-Versbach, Patrick & Franck, Jens-Uwe, 2015. "Endogenous price commitment, sticky and leadership pricing: Evidence from the Italian petrol market," International Journal of Industrial Organization, Elsevier, vol. 40(C), pages 32-48.
    4. Dechenaux, Emmanuel & Mago, Shakun D., 2019. "Communication and side payments in a duopoly with private costs: An experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 165(C), pages 157-184.
    5. Harrington, Joseph E., 2017. "A theory of collusion with partial mutual understanding," Research in Economics, Elsevier, vol. 71(1), pages 140-158.
    6. Joseph E. Harrington, Jr., 2012. "A Theory of Tacit Collusion," Economics Working Paper Archive 588, The Johns Hopkins University,Department of Economics.

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    More about this item

    Keywords

    Tacit collusion; kinked demand curve; price rigidity;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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