Collusive Price Rigidity under Price-matching Punishment
Code:
11-14
Authors:
Garrod, L.
Date:
01 Dec 2011
Abstract
Collusive Price Rigidity under Price-matching Punishment
By Garrod, L.
By analysing an inÖnitely repeated game where unit costs alternate stochastically between low and high states and where Örms follow a price-matching punishment strategy, we demonstrate that the best collusive prices are rigid over time when the two cost levels are su¢ ciently 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 proÖts. The relationships between such price rigidity and the expected duration of a high-cost phase, the degree of product di§erentiation, and the number of Örms in the market are also investigated.
