Academic Commons

Reports

Collusion with persistent cost shocks

Bagwell, Kyle; Athey, Susan

We consider a dynamic Bertrand game, in which prices are publicly observed and each firm receives a privately observed cost shock in each period. Although cost shocks are independent across firms, within a firm costs follow a first-order Markov process. We analyze the set of collusive equilibria available to firms, emphasizing the best collusive scheme for the firms at the start of the game. In general, there is a tradeoff between productive efficiency, whereby the low-cost firm serves the market in a given period, and high prices. We show that when costs are perfectly correlated over time within a firm, if the distribution of costs is log concave and firms are sufficiently patient, then the optimal collusive scheme entails price rigidity: firms set the same price and share the market equally, regardless of their respective costs. Productive efficiency can be achieved in equilibrium under some circumstances, but such equilibria are not optimal. When serial correlation of costs is imperfect, partial productive efficiency is optimal. For the case of two cost types, first-best collusion is possible if the firms are patient relative to the persistence of cost shocks, but not otherwise. We present numerical examples of first-best collusive schemes.

Subjects

Files

More About This Work

Academic Units
Economics
Publisher
Department of Economics, Columbia University
Series
Department of Economics Discussion Papers, 0405-07
Published Here
March 25, 2011

Notes

December 2004

Academic Commons provides global access to research and scholarship produced at Columbia University, Barnard College, Teachers College, Union Theological Seminary and Jewish Theological Seminary. Academic Commons is managed by the Columbia University Libraries.