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Cartel pricing dynamics with reference-dependent preferences

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  • Manganelli, Anton-Giulio

Abstract

This paper characterizes cartel pricing dynamics when consumers have reference-dependent preferences. Firms have a common discount factor unknown to consumers and a common cost i.i.d. over time. Consumers observe prices over time and update their expectations about firms’ ability to collude, which affects consumers’ price expectations. Reference-dependent preferences make consumers lose utility when the actual price is higher than the expected one, which forces colluding firms to raise prices alongside consumers’ price expectations. This increasing price path is capped by the price arising when consumers are sure that firms collude.

Suggested Citation

  • Manganelli, Anton-Giulio, 2017. "Cartel pricing dynamics with reference-dependent preferences," Economics Letters, Elsevier, vol. 150(C), pages 91-94.
  • Handle: RePEc:eee:ecolet:v:150:y:2017:i:c:p:91-94
    DOI: 10.1016/j.econlet.2016.11.016
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    References listed on IDEAS

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    1. Joseph E. Harrington, 2005. "Optimal Cartel Pricing In The Presence Of An Antitrust Authority," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(1), pages 145-169, February.
    2. Joseph E. Harrington, 2004. "Post-Cartel Pricing During Litigation," Journal of Industrial Economics, Wiley Blackwell, vol. 52(4), pages 517-533, December.
    3. John Connor, 2001. "“Our Customers Are Our Enemies”: The Lysine Cartel of 1992–1995," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 18(1), pages 5-21, February.
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    5. Botond Kőszegi & Paul Heidhues, 2008. "Competition and Price Variation When Consumers Are Loss Averse," American Economic Review, American Economic Association, vol. 98(4), pages 1245-1268, September.
    6. Harrington, Joseph Jr. & Chen, Joe, 2006. "Cartel pricing dynamics with cost variability and endogenous buyer detection," International Journal of Industrial Organization, Elsevier, vol. 24(6), pages 1185-1212, November.
    7. Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1039-1061.
    8. Joseph E. Harrington, Jr., 2004. "Cartel Pricing Dynamics in the Presence of an Antitrust Authority," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 651-673, Winter.
    9. Joseph E. Harrington, Jr, 2006. "How Do Cartels Operate?," Economics Working Paper Archive 531, The Johns Hopkins University,Department of Economics.
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    11. Thaler, Richard, 1980. "Toward a positive theory of consumer choice," Journal of Economic Behavior & Organization, Elsevier, vol. 1(1), pages 39-60, March.
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    More about this item

    Keywords

    Cartel pricing dynamics; Reference-dependent preference; Discount factor uncertainty;

    JEL classification:

    • 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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