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Colluding on Relative Prices

Ralph Winter ()

RAND Journal of Economics, 1997, vol. 28, issue 2, 359-371

Abstract: Firms sometimes agree to limit the discounts they offer a class of customers, i.e., they collude on the price differences across consumer classes. Why? Courts have struck down agreements to limit discounts as violations of the laws against price-fixing. Are these collusive agreements in fact efficient? This article addresses these questions in a multiproduct duopoly model. Under one interpretation, the incentive to collude on relative prices can be traced to heterogeneity in consumers' time costs. Under fairly general conditions, total surplus increases with the collusion. This efficiency effect is most striking in the case where collusion raises the prices faced by all consumers over which firms compete.

Date: 1997
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Handle: RePEc:rje:randje:v:28:y:1997:i:summer:p:359-371