Collusive Pricing With Consumer Search

Download or read book Collusive Pricing with Consumer Search written by Vartan Shadarevian and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: To make sense of mixed empirical evidence on the pricing rigidity of cartels, this paper studies how colluding firms price their goods in a model where firms have private marginal costs and sell to consumers with search costs. In this model, firms repeatedly interact in selling a homogeneous good, and consumers pay a search cost to observe the full menu of prices in a market. While firms can agree on a collusive strategy that increases prices, they cannot coordinate perfectly on their responses to stochastic, idiosyncratic marginal cost shocks. The model highlights an important stability-efficiency trade-off that leads to differential pricing behavior which depends on firms' discount factors. Specifically, when firms are sufficiently impatient, stability is most important, and the optimal cartel equilibrium involves rigid pricing. In contrast, when firms are sufficiently patient, efficiency is more important, and at high search costs the optimal cartel may increase its price variance above monopoly levels to induce search and sort consumers to the lower cost firm. Applications to cartel screening are discussed.