A Dynamic Oligopoly with Collusion and Price Wars

By Chaim Fershtman, Ariel Pakes. 2000

220 citations recorded by the source corpus.

Most of the theoretical work on collusion and price wars assumes identical firms and an unchanging environment, assumptions which are at odds with what we know about most industries. Further that literature focuses on the impact of collusion on prices. Whether an industry can support collusion also effects investment incentives and hence the variety, cost, and quality of the products marketed. We provide a collusive framework with heterogeneity among firms, investment, entry, and exit. It is a symmetric information model in which it is hard to sustain collusion when either one of the firms does not keep up with the advances of its competitors, or a low quality' entrant enters. In either case there will be an active firm that is quite likely to exit after it deviates, but if one of the competitors is near an exit state the other incumbent(s) has an incentive to price predatorily (that is to deviate themselves). We use numerical analysis to compare an institutional structure that allows for collusion to one which does not (perhaps because of an active antitrust authority). Price paths clearly differ in the two environments; in particular only the collusive industry generates price wars. The collusive industry offers both more and higher quality products to consumers, albeit often at a higher price. The positive effect of collusion on the variety and quality of products marketed more than compensates consumers for the negative effect of collusive prices, so that consumer surplus is larger in the collusive environment.

Subfields: Economics and Econometrics, Marketing

View Paper: https://www.semanticscholar.org/paper/e95c17abeaaea3639cf2a633945cdb4f74a1a093

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Citations in the corpus

A Dynamic Oligopoly Structural Model for the Prescription Drug Market After Patent Expiration (2010, unknown): “, Fershtman and Pakes[24], Gowrisankaran[27], Cheong and Judd[13]).”
Does Multimarket Contact Facilitate Tacit Collusion? Inference on Conduct Parameters in the Airline Industry (2012, background): “[27] Fershtman, Chaim, and Ariel Pakes (2000) "A Dynamic Oligopoly with Collusion and Price Wars", Rand Journal of Economics, 31(2), 207-236.”
Econometric Tools for Analyzing Market Outcomes (2007, background): “Four exceptions are Gowrisankaran and Town (1997), Benkard (2004), Jofre-Bonet and Pesendorfer (2003), and Ryan (2006).”
The Costs of Environmental Regulation in a Concentrated Industry (2012, methodology): “All firms 14My model is similar to several other applications of the Ericson-Pakes framework; see, for example, Fershtman and Pakes (2000), Gowrisankaran and Town (1997), Besanko and Doraszelski (2004), Doraszelski and Satterthwaite (2010), and Benkard (2004). then simultaneously make entry and…”
Leniency and Whistleblowers in Antitrust (2006, background): “Fershtman and Pakes (2000), Kranton (2003), and Calzolari and Spagnolo (2005) present dynamic models where reducing competition by fixing prices can be beneficial for both producers and consumers.”
POST-CARTEL PRICING DURING LITIGATION (2004, unknown): “24 Such a phenomenon occurs in Fersthman and Pakes [2000] .”