Staggered Price Changes in Cartels

Nguyen, Thi Hoang Lan (2013). Staggered Price Changes in Cartels Honours Thesis, School of Economics, The University of Queensland.

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Author Nguyen, Thi Hoang Lan
Thesis Title Staggered Price Changes in Cartels
School, Centre or Institute School of Economics
Institution The University of Queensland
Publication date 2013-11
Thesis type Honours Thesis
Supervisor A/Prof. Heiko Gerlach
Total pages 82
Language eng
Subjects 14 Economics
Formatted abstract

Motivated by the regularity of staggered price changes in real-world cartel cases, this thesis aims to develop a model of collusive price leadership with a time lag between the price movements of the leader and the follower. In our model, firms agree on a leader who will change its price in the first period, while the follower will wait until period 2 to follow. They will collude at the new price from period 2 onwards.

We find that the inclusion of the lag period does indeed produce significantly different results from previous models in the literature where the lag is absent. For instance, we show that collusion is harder to sustain with sequential rather than simultaneous price changes. Specifically, for intermediate discount factors at which full collusion is sustainable in a simultaneous setting, firms are only able to sustain partial collusion (with price increases) or no collusion at all (with price decreases). This finding directly contradicts that of Mouraviev & Rey (2011), where firms can collude at the monopoly price for any discount factor when implementing a sequential price change.

Although the market is generally less collusive when asymmetry is introduced into the model, in line with the common belief in the literature, we discover that in certain cases, asymmetric market share can in fact improve collusive ability. By imposing cost asymmetry, we are also able to pinpoint the leader identity that would facilitate maximum collusion.

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Created: Thu, 19 Dec 2013, 13:59:25 EST by Yu-lin Huang on behalf of School of Economics