Monday, June 14, 2010
Posted by D. Daniel Sokol
Bos Iwan (Department of Organization & Strategy, Maastricht University), Peeters Ronald (Department of Economics, Maastricht University), and Pot Erik (Department of Quantitative Economics, Maastricht University) consider Competition versus Collusion: The Impact of Consumer Inertia.
ABSTRACT: We consider a model of dynamic price competition to analyze the impact of consumer inertia on the ability of firms to sustain high prices. Three main consequences are identified, all of which contrast with predictions of the standard model of collusion: (i) maintaining high prices does not require punishment strategies when firms are sufficiently myopic, (ii) if buyers are sufficiently inert, then high prices can be sustained for all discount factors, and (iii) the ability to maintain high prices may depend non-monotonically on the level of the discount factor when the industry exhibits network externalities and demand is sufficiently viscous. These results provide a number of interesting insights with regard to competitive and collusive pricing behavior. In particular, we illustrate how direct communication between firms may facilitate collusion.