Tacit Collusion with Price-Matching Punishments

Abstract:     
Tacit collusion is explored under a strategy in which, loosely speaking, firms match the lowest price set by any firm in the previous period. Conditions are provided under which this strategy supports collusive outcomes in a subgame perfect equilibrium. In contrast to traditional results, the highest collusive price is always lower than the monopoly price. It corresponds to the unique Nash equilibrium price when upward and downward price deviations are matched. Our paper provides a game theoretic interpretation of the old kinked demand curve theory which unlike earlier attempts does not depart from standard timing assumptions to do so.

Keywords: Collusion, intertemporal reaction functions, kinked demand curve

JEL Classification: L11, L12, L13, L41

Accepted Paper Series