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Collusion and turnover in experience goods markets

Author

Listed:
  • Daniel Monte

    (Sao Paulo School of Economics-FGV)

  • Ideen Riahi

    (CUNY)

  • Nikolaus Robalino

    (Rochester Institute of Technology)

Abstract

We study an infinite horizon duopoly with identical long-lived firms and a sequence of short-lived consumers. Consumers are willing to pay more for a higher-quality good, but quality is a noisy function of the firm’s unobserved effort, and it cannot be observed by consumers prior to purchase. We show that a duopoly can overcome this moral hazard problem, and that it can outperform a monopoly in terms of both efficiency and producer surplus. Specifically, we consider collusive N-turnover equilibria, which involve buyers switching firms in perpetuity, i.e., buying from one firm until that firm delivers bad quality N times, and then switching to the other firm. We show (1) that first-best efficiency can be achieved by duopoly in a collusive N-turnover equilibrium, even when monopoly cannot avoid deadweight loss, and (2) that monopoly profit in any equilibrium is strictly dominated by joint duopoly profit in some collusive N-turnover equilibrium.

Suggested Citation

  • Daniel Monte & Ideen Riahi & Nikolaus Robalino, 2019. "Collusion and turnover in experience goods markets," Review of Economic Design, Springer;Society for Economic Design, vol. 23(3), pages 91-111, December.
  • Handle: RePEc:spr:reecde:v:23:y:2019:i:3:d:10.1007_s10058-019-00224-0
    DOI: 10.1007/s10058-019-00224-0
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    References listed on IDEAS

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    More about this item

    Keywords

    Experience goods; Duopoly; Tacit collusion; Turnover; Efficiency;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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