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Capacity precommitment, communication, and collusive pricing: theoretical benchmark and experimental evidence

Author

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  • Werner Güth

    (Libera Università Internazionale degli Studi Sociali (LUISS)
    Max Planck Institute for Collective Goods)

  • Manfred Stadler

    (University of Tübingen)

  • Alexandra Zaby

    (Seeburg Castle University)

Abstract

We use a first-capacity-then-price-setting game as a theoretical benchmark for an experimental study which identifies capacity precommitment, intra-play communication, and prior experience as crucial factors for collusive pricing. The theoretical model determines capacity thresholds above which firms have an incentive to coordinate on higher than equilibrium prices. The experimental data confirm that intra-play communication after capacity but before price choices fosters collusion only for capacity levels exceeding these thresholds. If communication is abandoned, prices nevertheless remain high. Asymmetry in capacities decreases the reliability of price messages as well as the probability to coordinate on equal prices.

Suggested Citation

  • Werner Güth & Manfred Stadler & Alexandra Zaby, 2020. "Capacity precommitment, communication, and collusive pricing: theoretical benchmark and experimental evidence," International Journal of Game Theory, Springer;Game Theory Society, vol. 49(2), pages 495-524, June.
    • Handle: RePEc:spr:jogath:v:49:y:2020:i:2:d:10.1007_s00182-020-00718-0
    DOI: 10.1007/s00182-020-00718-0
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    More about this item

    Keywords

    Capacity-price competition; Intra-play communication; Collusion; Experimental economics;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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