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Cartelization under present bias and imperfect public signals

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  • Cheng, Long
  • McDonald, Stuart
  • Ye, Guangliang

Abstract

This paper explores the impact of present bias on trigger pricing strategies that are used to support a cartel in a market where firms can only observe a noisy price signal. The present bias of firm management is modelled by using quasi-hyperbolic discounting that the discount factor between the present and next period is βδ, and between any two adjacent periods later it is δ. We demonstrate that there is a threshold value β̲(δ), which is decreasing in δ. For β≥β̲(δ), we show that there exists a Nash reversion trigger strategy for the cartel, featuring lower prices, higher outputs and longer periodic price wars. As a consequence, the trigger price, which is shown to be proportional to the cartel price, is always lower than that in the Green-Porter model.

Suggested Citation

  • Cheng, Long & McDonald, Stuart & Ye, Guangliang, 2023. "Cartelization under present bias and imperfect public signals," Mathematical Social Sciences, Elsevier, vol. 123(C), pages 77-86.
    • Handle: RePEc:eee:matsoc:v:123:y:2023:i:c:p:77-86
    DOI: 10.1016/j.mathsocsci.2023.01.004
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