Collusion and Price Rigidity

By Susan Athey, K. Bagwell, C. Sanchirico. 2004

395 citations recorded by the source corpus.

We consider an infinitely repeated Bertrand game, in which prices are publicly observed and each firm receives a privately observed, i.i.d. cost shock in each period. We focus on symmetric perfect public equilibria, wherein any "punishments" are borne equally by all firms. We identify a tradeoff that is associated with collusive pricing schemes in which the price to be charged by each firm is strictly increasing in its cost level: such "fully sorting" schemes offer efficiency benefits, as they ensure that the lowest-cost firm makes the current sale, but they also imply an informational cost (distorted pricing and/or equilibrium-path price wars), since a higher-cost firm must be deterred from mimicking a lower-cost firm by charging a lower price. A rigid-pricing scheme, where a firm's collusive price is independent of its current cost position, sacrifices efficiency benefits but also diminishes the informational cost. For a wide range of settings, the optimal symmetric collusive scheme requires (i) the absence of equilibrium-path price wars and (ii) a rigid price. If firms are sufficiently impatient, however, the rigid-pricing scheme cannot be enforced, and the collusive price of lower-cost firms may be distorted downward in order to diminish the incentive to cheat. When the model is modified to include i.i.d. public demand shocks, the downward pricing distortion that accompanies a firm's lower-cost realization may occur only when current demand is high. Copyright 2004, Wiley-Blackwell.

Subfields: Economics and Econometrics, Management Science and Operations Research, Marketing

View Paper: https://www.semanticscholar.org/paper/b2f1899ca71e025073874a5df66d1cfbbbf97906

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Citations in the corpus

Competitive Procurement with Corruption (2004, background): “See McAfee and McMillan (1992), Athey and Bagwell (2001), and Athey, Bagwell and Sanchirico (2001). 26 This need not be a pure strategy.”
Efficiency in Games with Markovian Private Information (2013, background): “2For economic applications, see, for example, Athey, Bagwell, and Sanchirico (2004) on oligopolistic competition, Levin (2003) on relational contracting, Maggi and Morelli (2006) on voting in international organizations, or Skrzypacz and Hopenhayn (2004) on repeated auctions.”
A Variance Screen for Collusion (2006, neutral): “Both Athey et al. (2004) and Harrington and Chen (2004) predict that during conspiracies, price responds less to cost shocks under collusion, or that collusion reduces price variance.”
Resale price maintenance and collusion (2007, background): “" 3 Rey and Tir?le (1986) offer an overview of the relative merits of price and non-price restrictions in improving vertical coordination between a manufacturer and its retailers.”
Collusion With Persistent Cost Shocks (2008, background): “It is interesting to observe that the optimal equilibrium is the same as the optimal equilibrium in the model studied by Athey, Bagwell, and Sanchirico (2004), in which costs are independent over time but rms use strongly symmetric perfect public equilibria (SPPE), whereby at the beginning of each…”
Corruption and Competition in Procurement Auctions (2005, background): “To conclude this section we wish to emphasize that our results do not hinge on our particular 15 In our model, collusion is profitable and hence, not surprisingly, also generates ex post inefficiencies, as in McAfee and McMillan (1992) or Athey, Bagwell, and Sanchirico (2004).”
Explicit vs. Tacit Collusion – The Impact of Communication in Oligopoly Experiments (2012, neutral): “Regarding NoTalk, several experiments without communication have already confirmed this hypothesis, although in different settings.(5) For the Talk condition, we are unaware of a systematic experimental investigation of the effect of the number of firms.”
Building Routines: Learning, Cooperation, and the Dynamics of Incomplete Relational Contracts (2010, methodology): “The particular nature of the informational asymmetry bears much resemblance to the models of Athey and Bagwell (2001), Levin (2003) and Athey, Bagwell and Sanchirico (2004) who also consider situations in which actions are observable but the players' costs for those actions are private.”