Collusion and turnover in experience goods markets

Daniel Monte (), Ideen Riahi () and Nikolaus Robalino ()
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Daniel Monte: Sao Paulo School of Economics-FGV
Ideen Riahi: CUNY
Nikolaus Robalino: Rochester Institute of Technology

Review of Economic Design, 2019, vol. 23, issue 3, No 1, 111 pages

Abstract: Abstract We study an infinite horizon duopoly with identical long-lived firms and a sequence of short-lived consumers. Consumers are willing to pay more for a higher-quality good, but quality is a noisy function of the firm’s unobserved effort, and it cannot be observed by consumers prior to purchase. We show that a duopoly can overcome this moral hazard problem, and that it can outperform a monopoly in terms of both efficiency and producer surplus. Specifically, we consider collusive N-turnover equilibria, which involve buyers switching firms in perpetuity, i.e., buying from one firm until that firm delivers bad quality N times, and then switching to the other firm. We show (1) that first-best efficiency can be achieved by duopoly in a collusive N-turnover equilibrium, even when monopoly cannot avoid deadweight loss, and (2) that monopoly profit in any equilibrium is strictly dominated by joint duopoly profit in some collusive N-turnover equilibrium.

Keywords: Experience goods; Duopoly; Tacit collusion; Turnover; Efficiency (search for similar items in EconPapers)
JEL-codes: C7 D8 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/s10058-019-00224-0

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