A Cost-Side Analysis on Collusive Sustainability

Luca Lambertini () and D. Sasaki

No 710, Department of Economics - Working Papers Series from The University of Melbourne

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 (1986), Lambson (1987), and Hackner (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 price constraints, marginal costs can serve as a "fudge" to materialise 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.

Keywords: OLIGOPOLIES; MARKET STRUCTURE; GAME THEORY (search for similar items in EconPapers)
JEL-codes: C72 D43 L13 (search for similar items in EconPapers)
Pages: 20 pages
Date: 1999
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