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Tacit Collusion with Low-Price Guarantees

Manchester School, Forthcoming

27 Pages Posted: 1 Nov 2010 Last revised: 24 Apr 2012

Qihong Liu

University of Oklahoma - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: December 21, 2011

Abstract

There is a large literature on the impact of price-matching and price-beating guarantees (low-price guarantees) on competition. Existing studies typically employ static models and the results are sensitive to modeling assumptions such as the type of guarantees, consumer hassle costs and consumer heterogeneity. In contrast, we employ a fully dynamic model and show that low-price guarantees robustly facilitate tacit collusion, by reducing a deviating firm's immediate deviation profit. This robustness of results in dynamic models, relative to the sensitivity of results in static models is due to the difference between equilibrium concepts in the two types of models. In a static model, any equilibrium has to be immune from incentive for any deviation, including infinitesimal deviation. In a dynamic model, however, one can ignore infinitesimal deviations since they lead to infinitesimal immediate gain but finite loss in ensuing punishments and firms never have incentive for such deviations.

Keywords: Low-price guarantee, Price-matching, Price-beating, Tacit collusion

JEL Classification: D43, L13

Suggested Citation

Liu, Qihong, Tacit Collusion with Low-Price Guarantees (December 21, 2011). Manchester School, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1700722 or http://dx.doi.org/10.2139/ssrn.1700722

Qihong Liu (Contact Author)

University of Oklahoma - Department of Economics ( email )

Norman, OK 73019-2103
United States
405-325-5846 (Phone)

HOME PAGE: http://qliu.oucreate.com

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