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Collusion, Fluctuating Demand, and Price Rigidity

Author

Listed:
  • Makoto Hanazono

    () (Institute of Economic Research, Kyoto University)

  • Huanxing Yang

    () (Department of Economics, University of Pennsylvania)

Abstract

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.

Suggested Citation

  • Makoto Hanazono & Huanxing Yang, 2004. "Collusion, Fluctuating Demand, and Price Rigidity," KIER Working Papers 589, Kyoto University, Institute of Economic Research.
  • Handle: RePEc:kyo:wpaper:589
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    Cited by:

    1. Garrod, Luke, 2012. "Collusive price rigidity under price-matching punishments," International Journal of Industrial Organization, Elsevier, vol. 30(5), pages 471-482.
    2. Lee, Gea M., 2010. "Optimal collusion with internal contracting," Games and Economic Behavior, Elsevier, vol. 68(2), pages 646-669, March.
    3. repec:eee:indorg:v:53:y:2017:i:c:p:353-370 is not listed on IDEAS
    4. Mamello Nchake, Lawrence Edwards and Asha Sundaram, 2015. "Price-setting Behavior and Competition in Developing Countries: An Analysis of Retail Outlets in Lesotho," Working Papers 567, Economic Research Southern Africa.
    5. Joseph E. Harrington, Jr, 2005. "Detecting Cartels," Economics Working Paper Archive 526, The Johns Hopkins University,Department of Economics.
    6. Malcomson, James M., 2015. "Relational incentive contracts with productivity shocks," Games and Economic Behavior, Elsevier, vol. 92(C), pages 122-137.
    7. Luke Garrod & Matthew Olczak, 2017. "Collusion Under Imperfect Monitoring with Asymmetric Firms," Journal of Industrial Economics, Wiley Blackwell, vol. 65(3), pages 654-682, September.
    8. Bagwell Kyle & Lee Gea M., 2010. "Advertising Collusion in Retail Markets," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-54, August.
    9. Harrington, Joseph E., 2017. "A theory of collusion with partial mutual understanding," Research in Economics, Elsevier, vol. 71(1), pages 140-158.
    10. Harrington, Joseph E. & Zhao, Wei, 2012. "Signaling and tacit collusion in an infinitely repeated Prisoners’ Dilemma," Mathematical Social Sciences, Elsevier, vol. 64(3), pages 277-289.
    11. Joseph E. Harrington, Jr. & Wei Zhao, 2012. "Signaling and Tacit Collusion in an Infinitely Repeated Prisoners' Dilemma," Economics Working Paper Archive 587, The Johns Hopkins University,Department of Economics.
    12. Joseph E. Harrington, Jr., 2012. "A Theory of Tacit Collusion," Economics Working Paper Archive 588, The Johns Hopkins University,Department of Economics.
    13. Wang, Chengsi & Zudenkova, Galina, 2016. "Non-monotonic group-size effect in repeated provision of public goods," European Economic Review, Elsevier, vol. 89(C), pages 116-128.
    14. Gerlach, Heiko, 2009. "Stochastic market sharing, partial communication and collusion," International Journal of Industrial Organization, Elsevier, vol. 27(6), pages 655-666, November.
    15. repec:oup:rcorpf:v:2:y:2014:i:2:p:188-234. is not listed on IDEAS
    16. Joseph E. Harrington, Jr. & Wei Zhao, 2010. "Signaling and Tacit Collusion in an Infinitely Repeated Prisoners' Dilemma," Economics Working Paper Archive 559, The Johns Hopkins University,Department of Economics.

    More about this item

    Keywords

    Collusion; private information; optimal pricing; price rigidity;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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