Stability of tacit collusion agreements in the Latin American inflationary environment

An inflationary environment affects the consumers' ability to distinguish between relative price changes and the generalized increase in prices observed in the economy, bringing about implications for cartel stability. We propose a framework to analyze how inflationary uncertainty, interacting with real demand shocks, plays a role in increasing cartel stability. In particular, we derive the result that the minimum value of the real demand shock able to induce firms to deviate from the collusion tacit agreement - modeled in a repeated game context - is an increasing function of the inflationary uncertainty. Other things equal, inflationary uncertainty brings about more stability to collusion tacit agreements. We illustrate how both real demand shocks and inflationary uncertainty play a role in cartel stability by analyzing empirical evidence from the Brazilian economy. Because of the implementation of stabilizing plan Real in 1994, we consider statistical evidence regarding two periods, 1986-1994 and 1995-2000. The results show that inflationary uncertainty affects positively cartel stability whereas real demand shocks have the opposite effect in 1986-1994 - years of high inflation.