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Demand forecasting, signal precision, and collusion with hidden actions

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  • Martin, Simon
  • Rasch, Alexander

Abstract

We analyze how higher demand-forecasting precision affects firms' chances of sustaining supracompetitive profits, depending on whether actions are observable or hidden. We identify a dual role of improving forecasting ability for situations in which actions are hidden. Improved forecasting ability increases the temptation for firms to deviate, reducing profits; at the same time, such ability reduces and eventually eliminates the uncertainty over whether deviations are occurring. Our framework, in which firms decide on prices and promotional activities, reveals a U-shaped relationship between profits and predictive ability. Generally, collusive profits may increase or decrease in signal precision, depending on action observability, highlighting the importance of industry-specific considerations for regulatory interventions and competition policy.

Suggested Citation

  • Martin, Simon & Rasch, Alexander, 2024. "Demand forecasting, signal precision, and collusion with hidden actions," International Journal of Industrial Organization, Elsevier, vol. 92(C).
  • Handle: RePEc:eee:indorg:v:92:y:2024:i:c:s0167718723001054
    DOI: 10.1016/j.ijindorg.2023.103036
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    More about this item

    Keywords

    Algorithm; Collusion; Demand forecasting; Hidden actions; Signal precision;
    All these keywords.

    JEL classification:

    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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