Collusion, Price Dispersion, and Fringe Competition
57 Pages Posted: 27 Sep 2019 Last revised: 11 Nov 2020
Date Written: September 16, 2019
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 explains the survival of a price-setting cartel in a homogeneous product market, provides a collusive rationale for sales and Edgeworth cycles, and characterises the cartel's manipulation of its fringe rival through a double cut-off rule.
Keywords: L13, D83
JEL Classification: Collusion, fringe competition, obfuscation, price dispersion
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