Collusion and Coercion with Naive Rivals

Collusion and Coercion with Naive Rivals

Zach Brown

University of Michigan

Alexander MacKay

Harvard University - Business School (HBS)

 

Abstract

Standard models of collusion require that all firms are forward-looking and strategic. When one firm displays naive behavior—i.e., when it is myopic, memoryless, or non-strategic—typical collusive strategies cannot be supported in equilibrium. Motivated by the increasing adoption of high-speed pricing algorithms that monitor rivals' prices, we consider instead a model in which a single firm can update prices faster than its rivals. We show that this expands the set of strategies that yield prices above the competitive equilibrium. With sufficiently fast pricing, a firm can unilaterally sustain price levels that maximize joint profits even when all of its rivals are naive. We also characterize a coercive equilibrium that maximizes the profits of the faster firm. Overall, faster pricing provides a single firm with the ability to induce market outcomes that yield higher profits and lower consumer surplus.