Retail Price Fixity as a Facilitating Mechanism

Timothy J. Richards and Paul M. Patterson

American Journal of Agricultural Economics, 2005, vol. 87, issue 1, 85-102

Abstract: Previous theoretical explanations for retail price fixity show that fixed retail prices can be consistent with either competitive or imperfectly competitive behavior. We develop a conceptual model of retail pricing wherein fixed price points are facilitating mechanisms for tacit collusion. A non-cooperative equilibrium in fixed retail prices is supported through credible threats to revert to Nash pricing if cheating is suspected. We test the implications of this model using a two-stage, ordered probit approach in weekly supermarket pricing data. The results show that price fixity does support collusive equilibria among retailers, but other factors may also explain retail price behavior. Copyright 2005, Oxford University Press.

Date: 2005
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