GARROD, L., 2011. Collusive price rigidity under price-matching punishments. 9th Annual International Industrial Organization Conference, Boston, USA, April 24th-26th 2015, 31pp.
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 a conference paper.
The support of the Economic and Social Research Council (UK) is gratefully acknowledged.