Collusion, Fluctuating Demand, and Price Rigidity
We study an infinitely repeated Bertrand game in which an i.i.d. demand shock occures in each period. Each firm recieves a private signal about the demand shock at the beginning of each period. At the end of each period, information about both the underlying demand shock and the rival's prices becomes public. A firm's pricing schedule can be either a sorting scheme, in which its price depends on its private signal, or a price-rigidity scheme, in which the firm charges the same price regardless of its private signal. We consider the optiomal symmetric perfect public equilibrium (SPPE). The optimal SPPE consists of a profile of price-rigidity schemes if the accuracy of the private signals is low. Moreover, the lower the variance of the demand shock, the more likely that a price-rigidity scheme is optimal. These results contribute to our understanding of which industries, and under what conditions, should exhibit rigid prices.
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