Cost Information Alters “Competitive” Pricing: an Experimental Investigation about the Role of Dispersion of Accurate Cost Information

This study investigates the role of internal cost information for initiating and sustaining tacit collusion. Relying on the importance of cost information for setting prices, we predict that internal cost information serves as a focal point for price setting. Relying on the importance of common focal points for initiating and sustaining tacit collusion, we expect that the role of collusion-facilitating factors such as increased monitoring and common market history is moderated by the dispersion of accurate cost information in the market. Specifically, we expect that the influence of collusion-facilitating factors on firm profits will be higher if all firms in a market rely on accurate cost information (i.e. full dispersion) compared to the situation in which not all firms in the market rely on accurate cost information (i.e. partial dispersion). The results of an experiment in a differentiated price setting duopoly are consistent with our hypotheses. By illuminating the role of cost information for initiating and sustaining tacit collusion, this study emphasizes the importance of accurate cost information and common internal focal points for price coordination. Our results can also explain the inconsistent findings about the influence of competition on the accuracy of the cost system and have interesting implications for the design of competition policy.