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Cartels and Search

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  • Ireland, Norman

    (University of Warwick)

  • Waterson, Michael

    (University of Warwick)

Abstract

This paper unifies two significant but somewhat contradictory ideas. First, search costs potentially influence market price equilibria significantly; in many equilibria consumers do not search despite above-competitive prices. Second, cartels must guard against individual members offering lower prices, thereby creating incentives for consumers to search. We develop a simple framework, and then an example, in which whether search takes place depends upon the magnitude of search costs. Three potential equilibria result, dependent upon model parameters. These include a tacit cartel agreement exhibiting price variance and volatility. A policy conclusion is that such market characteristics do not always guarantee non-cartelisation.

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2006/twerp_770.pdf
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Bibliographic Info

Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 770.

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Length: 36 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:wrk:warwec:770

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  1. David P. Myatt & Justin P. Johnson, 2004. "On the Simple Economics of Advertising, Marketing, and Product Design," Economics Series Working Papers 185, University of Oxford, Department of Economics.
  2. Albaek, Svend & Mollgaard, Peter & Overgaard, Per B, 1997. "Government-Assisted Oligopoly Coordination? A Concrete Case," Journal of Industrial Economics, Wiley Blackwell, vol. 45(4), pages 429-43, December.
  3. Anderson, S.P. & Renault, R., 1997. "Pricing, Product Diversity and Search Costs: A Bertrand-Chamberlin-Diamond Model," Papers 97.481, Toulouse - GREMAQ.
  4. Stiglitz, J E, 1979. "Equilibrium in Product Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 69(2), pages 339-45, May.
  5. Joseph E. Harrington, Jr, 2005. "Detecting Cartels," Economics Working Paper Archive 526, The Johns Hopkins University,Department of Economics.
  6. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
  7. Shilony, Yuval, 1977. "Mixed pricing in oligopoly," Journal of Economic Theory, Elsevier, vol. 14(2), pages 373-388, April.
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