GARROD, L., 2012. Collusive price rigidity under price-matching punishments. International Journal of Industrial Organization, 30 (5), pp.471-482.
By analysing an infinitely repeated game where unit costs alternate stochastically
between low and high states and where firms follow a price-matching
punishment strategy, we demonstrate that the best collusive prices are rigid
over time when the two cost levels are sufficiently close. This provides game
theoretic support for the results of the kinked demand curve. In contrast to
the kinked demand curve, it also generates predictions regarding the level and
the determinants of the best collusive price, which in turn has implications
for the corresponding collusive profits. The relationships between such price
rigidity and the expected duration of a high-cost phase, the degree of product
differentiation, and the number of firms in the market are also investigated.
This is an Open Access Article. It is published by Elsevier under the Creative Commons Attribution 3.0 Unported Licence (CC BY). Full details of this licence are available at: http://creativecommons.org/licenses/by/3.0/
This work was supported by the Engineering and Physical Sciences Research Council (EPSRC).