The price commitment model of Maskin and Tirole (1988) provides an extensively cited foundation for Edgeworth cycles. We examine the viability of Edgeworth cycles when price commitment is partial in the sense that a subset of firms are committed to price in each period. If multiple firms are not committed in each period, then the existence of Edgeworth cycle equilibria requires a demanding concavity condition on the profit function. We use this result to motivate a simple timing test for the theory. We apply this test to the market for retail gasoline in Perth in which the timing of price changes is precisely observed. The test suggests that the timing of play is not well matched to the model of price commitment.
We adapt the framework of Spiegler (2015) to examine the effect of limited product comparability on the viability of collusion. Firms choose messages to influence the propensity of consumers to compare products. If firms are committed to messages, obfuscation relaxes the incentive constraints of a cartel iff a non-empty strict subset of products are incomparable with positive probability. If messages are adaptable, the cartel seeks opacity on the equilibrium path, while optimal punishment depends on transparency. In this case, obfuscation may help or hinder collusion.
We study the optimal behaviour of a cartel faced with fringe competition and imperfectly attentive consumers. Intertemporal price dispersion obfuscates consumer price comparison which aids the cartel through two channels: it reduces the effectiveness of free riding by the fringe; and it relaxes the cartel's internal incentive constraints. Our theory provides a collusive rationale for sales and Edgeworth cycles, explains the survival of a price-setting cartel in a homogeneous product market, and characterises the cartel's manipulation of its fringe rival through a simple cut-off rule.
We exploit a unique policy design in a retail gasoline market and an extensive sample of prices to document the evolution of pricing strategies and test between competing theories of price dynamics. We uncover a rich history of protracted price wars, repeated signaling, qualitative adjustments to price leadership and the standardization of pricing practices. We argue that the timing of play and pervasiveness of coordination difficulties is better captured by a simultaneous moves repeated games environment than the adoption ofMarkov strategies.
We develop a theory of optimal collusive intertemporal price dispersion. Dispersion clouds consumer price awareness, encouraging firms to coordinate on dispersed prices. Our theory generates a collusive rationale for price cycles and sales. Patient firms can support optimal collusion at the monopoly price. For less patient firms, monopoly prices must be punctuated with fleeting sales. The most robust structure involves asymmetric price cycles resembling Edgeworth cycles. Low consumer attentiveness enhances the effectiveness of price dispersion by reducing the payoff to deviations involving price reductions. However, for sufficiently low attentiveness, price rises are also a concern, limiting the power of obfuscation.
How does the Internet effect retail pricing? In contrast to previous empirical research that focuses on price dispersion and static margins, this paper examines how the Internet and web-based price clearing houses effect dynamic asymmetric pricing adjustment (e.g., "rockets and feathers"). We exploit a unique policy intervention in the context of the retail gasoline market that introduced a price clearinghouse in some markets but not others. We find stark evidence that the policy eliminated asymmetric price adjustment and increase the rate of passthrough of falling costs to retail prices. These results support search-based explanations for asymmetric price adjustment.
We present a formal framework to analyze the role of momentumin dynamic campaign races between two politicians. Momentum is modeled as a complementarity between current and past campaign spending in a way that is reminiscent of models of addiction and habit formation: the more effective a player's past spending has been, the more effective her future spending will be. For symmetric campaigns in which the effectiveness of campaign spending is of the Cobb-Douglas form, we derive analytic solutions for the equilibrium path. Our theory rationalizes alternative campaign strategies including aggressive openings and the development of a warchest for a final campaign assault.
We show that the multi-nomial logit model of demand implies a constant markup of price above marginal cost for multi-product oligopolists. Further, for the random coefficients discrete choice model of demand, a multi-product oligopolist optimally sets the same markup for two products if they share the same form of consumer heterogeneity, even if product characteristics differ markedly.
In a recent high profile case of collusion in the market for vitamin C, the cartel initially accommodated a fringe competitor before ultimately collapsing under the competitive burden. In this paper, the cartel's decision of when to dissolve is endogenised within a dynamic model of collusion. Demand estimates and cost information from the vitamin C market are used to calibrate the model. Results are intimately linked to the dynamic nature of the model. A cartel is found to persist only while fringe competitors remain small; fringe competitors invest heavily while a cartel is operating; entry deterrence is mitigated if cartel members are able to accommodate entry; and firms of an intermediate size are the most likely to accommodate entry.