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A Dynamic Oligopoly with Collusion and Price Wars

Author

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  • Chaim Fershtman
  • Ariel Pakes

Abstract

We provide a collusive framework with heterogeneity among firms, investment, entry, and exit. It is a symmetric-information model in which it is hard to sustain collusion when there is an active firm that is likely to exit in the near future. Numerical analysis is used to compare a collusive to a noncollusive environment. Only the collusive industry generates price wars. Also, the collusive industry offers both more and higher-quality products to consumers, albeit often at a higher price. The positive effect of collusion on variety and quality more than compensates for the negative effect of collusive prices, so that consumer surplus is larger with collusion.

Suggested Citation

  • Chaim Fershtman & Ariel Pakes, 2000. "A Dynamic Oligopoly with Collusion and Price Wars," RAND Journal of Economics, The RAND Corporation, vol. 31(2), pages 207-236, Summer.
    • Handle: RePEc:rje:randje:v:31:y:2000:i:summer:p:207-236
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    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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