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Tacit Collusion with Consumer Preference Costs

Author

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  • Roig Guillem

    (Faculty of Economics, Universidad del Rosario, Casa Pedro Fermín, Calle 12 C # 4 – 59 Bogotá, Colombia)

Abstract

When consumers have preference costs, two opposing effects need to be assessed to analyse the incentives of firms to set collusive prices. On the one hand, preference costs make a deviation from collusion less attractive, as the deviating firm must offer a large enough discount to cover the preference costs. On the other hand, preference costs lock in consumers and make punishment from rivals less effective. When preference costs are low, the latter of the two effects dominates and collusion is more challenging to sustain than in a situation with no preference costs. With high enough preference costs, collusion is a (weakly) dominant strategy. These results do not eventuate in a model with switching costs.

Suggested Citation

  • Roig Guillem, 2022. "Tacit Collusion with Consumer Preference Costs," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 22(1), pages 297-310, January.
    • Handle: RePEc:bpj:bejtec:v:22:y:2022:i:1:p:297-310:n:10
    DOI: 10.1515/bejte-2020-0042
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    Keywords

    tacit collusion; consumer preference costs; switching costs;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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