A dynamic oligopoly with collusion and price wars

Chaim Fershtman, Ariel Pakes

Research output: Contribution to journalArticlepeer-review

Abstract

We provide a collusive framework with heterogeneity among firms, investment, entry, and exit. It is a symmetric-information model in which it is hard to sustain collusion when there is an active firm that is likely to exit in the near future. Numerical analysis is used to compare a collusive to a noncollusive environment. Only the collusive industry generates price wars. Also, the collusive industry offers both more and higher-quality products to consumers, albeit often at a higher price. The positive effect of collusion on variety and quality more than compensates consumers for the negative effect of collusive prices, so that consumer surplus is larger with collusion.

Original languageEnglish
Pages (from-to)207-236
Number of pages30
JournalRAND Journal of Economics
Volume31
Issue number2
DOIs
StatePublished - 2000

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