Cartel Pricing Dynamics, Price Wars and Cartel Breakdown

Anton-Giulio Manganelli

No 12-309, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: This paper gives an unified explanation of some of the most widely known facts of the cartel literature: prices gradually rise, then remain constant, there can be price wars and some cartels break down. In this model consumers are loss averse and efficiency of a competitive fringe is not publicly observable. In the best collusive equilibrium, the price expectation can be so low that loss aversion makes consumers not buy at the maximal collusive price: firms then set a lower price that rises in time with consumers’ expectations. This increasing price path is bounded from above by the presence of the fringe. If the fringe sets a low price during a sufficient number of periods, there can be price wars and collusion can eventually break down.

Date: 2012-05
New Economics Papers: this item is included in nep-bec, nep-com, nep-hme and nep-ind
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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:25843

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