A Cost-side Analysis on Collusive Sustainability

Luca Lambertini () and D. Sasaki

Working Papers from Dipartimento Scienze Economiche, Universita' di Bologna

Abstract: In an oligopoly supergame, firms' actions in prices and quantities are subject to non-negativity constraints. These constraints can obstruct the practicability of optimal punishment (a la Abreu (1989), Lambson (1987), and Hacker (1996)) in sustaining tacit collusion. Noting that the prospect of single-period optimal punishment depends indispensably upon firms` ability to charge prices strictly below marginal costs (loss-making pricing), under the presence of positive rice constraints, marginal costs can serve as a fudge to materialize single-period optimal punishment. In this paper we characterise the effects of profit-cost ratios (or mark-ups) on the sustainability of tacit collusion, in light of optimal punishment.

Date: 1999-09
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Working Paper: A Cost-Side Analysis on Collusive Sustainability (1999)
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