Long-Lived Consumers, Intertemporal Bundling and Collusion

Authors


  • We want to thank Simon Board, George Deltas, Johannes Hörner, Preston McAfee, Tom Ross, Kathryn Spier, Scott Stern, Jusso Valimaki, Mike Waldman, two anonymous referees and especially the Editor, for helpful comments. We would also like to thank seminar participants at the UBC Sauder School, Canadian Economic Theory Conference 2006, City University of Hong Kong, International Industrial Organization Conference 2006, and 2007 North American Winter Meetings of the Econometric Society. We would also like to thank the Kellogg School of Management at Northwestern University, Northeastern University, and the Harvard Business School for financial support.

Abstract

In a repeated price game with long but finitely-lived consumers, long-term contracts facilitate collusion. Intertemporal bundling reduces the gains from business stealing but has little effect on the cost of the resulting price war. When consumers anticipate future price wars, the maximum deviation profit is a single period of consumer surplus per consumer. Hence long-term contracts do not increase the incentive to deviate per consumer, but do reduce the the number of consumers currently in the market by locking them into past contracts, so tacit collusion is sustainable for a wider range of discount factors and market structures.

Ancillary