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Surcharging as a Facilitating Practice

Listed author(s):
  • Luke Garrod


    (Centre for Competition Policy, University of East Anglia)

This paper shows how separately itemised surcharges potentially facilitate collussion during a temporary cost shock if firms commit to their duration. A duopoly model with price-matching punishments shows that if firms set higher prices they only receive punishment during the shock because they expect prices to fall in the future regardless of a deviation. When it is likely that costs will fall in the future, the price-matching punishment is too small to increase prices, so firms maintain rigid prices. When it is unlikely that costs will fall the punishment is harsh enough to sustain marginally higher supracompetitive prices. However, if firms commit to surcharges for the shock's duration they are able to set even higher prices, because surcharges effectively commit firms to a price decrease and so threaten a harsher punishment after the cost shock has ended.

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Paper provided by Centre for Competition Policy, University of East Anglia in its series Working Papers with number 06-17.

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Length: 32 pages
Date of creation: Oct 2006
Handle: RePEc:ccp:wpaper:wp06-17
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