Friday, September 30, 2011

Sales and Collusion in a Market with Storage

Posted by D. Daniel Sokol

Francesco Nava (LSE) and Pasquale Schiraldi (LSE) address Sales and Collusion in a Market with Storage.

ABSTRACT: Sales are a widespread and well-known phenomenon that has been documented in several product markets. Regularities in such periodic price reductions appear to suggest that the phenomenon cannot be entirely attributed to random variations in supply, demand, or the aggregate price level. Certain sales are traditional and so well publicized that it is difficult to justify them as devices to separate informed from uninformed consumers. This paper presents a model in which sellers want to reduce prices periodically in order to improve their ability to collude over time. In particular, the study shows that if buyers have heterogeneous storage technologies, periodic sales may facilitate collusion by magnifying intertemporal linking in consumers' decisions. The stability and the profitability of different sale strategies is then explored. The optimal sales discount and timing of sales are characterized. A trade-off between carte! l size and aggregate profits arises.

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