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On the sustainability of collusion in Bertrand supergames with discrete pricing and nonlinear demand

Zimmerman, Paul R. (2010): On the sustainability of collusion in Bertrand supergames with discrete pricing and nonlinear demand.

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Abstract

In traditional industrial organization models of Bertrand supergames, the critical discount factor governing the sustainability of collusion is independent of key demand and supply parameters. Recent research has demonstrated that these counterintuitive results stem from the assumption that firms can change prices in infinitesimally small increments (i.e., continuously). This note considers the effects of demand curvature in the context of a model of collusion where, as in Gallice (2008), Bertrand competitors can deviate only by lowering prices by some small, discrete amount. Two alternative demand specifications that capture the influence of demand curvature are considered. In either case, it is shown that with discrete price changes the critical discount factor is determined by the key demand parameters, including demand curvature. However, the direct effects of increased concavity (or convexity) in market demand on the sustainability of collusion runs in opposite directions across the two models. This discrepancy is shown to arise from the way in which the respective demand curves rotate in response to a change in the demand curvature parameter. The results support the conclusion of earlier research that determining the potential for collusion in homogenous goods industries likely requires careful case-by-case investigation.

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