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Collusion, Fluctuating Demand, And Price Rigidity

Author

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  • Makoto Hanazono
  • Huanxing Yang

Abstract

We study an infinitely repeated Bertrand game in which an i.i.d. demand shock occurs in each period. Each firm receives a private signal about the demand shock at the beginning of each period. At the end of each period, all information but the private signals becomes public. We consider the optimal symmetric perfect public equilibrium (SPPE) mainly for patient firms. We show that price rigidity arises in the optimal SPPE if the accuracy of the private signals is low. We also study the implications of more firms and firms' impatience on collusive pricing. Copyright 2007 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

Suggested Citation

  • Makoto Hanazono & Huanxing Yang, 2007. "Collusion, Fluctuating Demand, And Price Rigidity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(2), pages 483-515, May.
    • Handle: RePEc:ier:iecrev:v:48:y:2007:i:2:p:483-515
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    Citations

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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. Mamello A. Nchake & Lawrence Edwards & Asha Sundaram, 2018. "Price-setting Behavior and Competition in Developing Countries: an Analysis of Retail Outlets in Lesotho," Journal of Industry, Competition and Trade, Springer, vol. 18(4), pages 529-547, December.
    3. Joseph E. Harrington, Jr, 2005. "Detecting Cartels," Economics Working Paper Archive 526, The Johns Hopkins University,Department of Economics.
    4. Malcomson, James M., 2015. "Relational incentive contracts with productivity shocks," Games and Economic Behavior, Elsevier, vol. 92(C), pages 122-137.
    5. 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.
    6. Harrington, Joseph E., 2017. "A theory of collusion with partial mutual understanding," Research in Economics, Elsevier, vol. 71(1), pages 140-158.
    7. 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.
    8. Joseph E. Harrington, Jr., 2012. "A Theory of Tacit Collusion," Economics Working Paper Archive 588, The Johns Hopkins University,Department of Economics.
    9. Lee, Gea M., 2010. "Optimal collusion with internal contracting," Games and Economic Behavior, Elsevier, vol. 68(2), pages 646-669, March.
    10. Ari Kang & Richard Lowery, 2014. "The Pricing of IPO Services and Issues: Theory and Estimation," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 2(2), pages 188-234.
    11. 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.
    12. Sahuguet, Nicolas & Walckiers, Alexis, 2017. "A theory of hub-and-spoke collusion," International Journal of Industrial Organization, Elsevier, vol. 53(C), pages 353-370.
    13. Noam Shamir, 2017. "Cartel Formation Through Strategic Information Leakage in a Distribution Channel," Marketing Science, INFORMS, vol. 36(1), pages 70-88, January.
    14. 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.
    15. Danial Asmat, 2021. "Collusion Along the Learning Curve: Theory and Evidence From the Semiconductor Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 69(1), pages 83-108, March.
    16. 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.
    17. 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.
    18. Gerlach, Heiko, 2009. "Stochastic market sharing, partial communication and collusion," International Journal of Industrial Organization, Elsevier, vol. 27(6), pages 655-666, November.
    19. Ramakanta Patra & Tadashi Sekiguchi, 2021. "Full Collusion with Entry and Incomplete Information," KIER Working Papers 1055, Kyoto University, Institute of Economic Research.

    More about this item

    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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