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Collusion and price rigidity

  • Susan Athey

    ()

    (Stanford University - Department of Economics)

  • Kyle Bagwell

    ()

    (Columbia University - Department of Economics)

  • Chris Sanchirico

    ()

    (University of Pennsylvania Law School)

We consider an infinitely repeated Bertrand game, in which prices are publicly observed and each firm receives a privately observed, i.i.d. cost shock in each period. We focus on symmetric perfect public equilibria (SPPE), wherein any "punishments" are borne equally by all firms. We identify a tradeoff that is associated with collusive pricing schemes in which the price to be charged by each firm is strictly increasing in its cost level: such "fully sorting" schemes offer efficiency benefits, as they ensure that the lowest-cost fim makes the current sale, but they also imply an informational cost (distorted pricing and/or equilibrium-path price wars), since a higher-cost firm must be deterred from mimicking a lower-cost firm by charging a lower price. A rigid-pricing scheme, where a firm's collusive price is independent of its current cost position, sacrifices efficiency benefits but also diminishes the informational cost. For a wide range of settings, the optimal symmetric collusive scheme requires (i). the absence of equilibrium-path price wars and (ii). a rigid price. If firms are sufficiently impatient, however, the rigid-pricing scheme cannot be enforced, and the collusive price of lower-cost firms may be distorted downward, in order to diminish the incentive to cheat. When the model is modified to include i.i.d. public demand shocks, the downward pricing distortion that accompanies a firm's lower-cost realization may occur only when current demand is high.

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Paper provided by Columbia University, Department of Economics in its series Discussion Papers with number 0102-38.

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Length: 42 pages
Date of creation: 2002
Date of revision:
Handle: RePEc:clu:wpaper:0102-38
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