I wish to thank Yuk-fai Fong for helpful discussions which inspired this study. I would also like to thank the editor, an anonymous referee, Luke Garrod, Louis Kaplow, David Mandy, Catherine Mooney, Mark Owens, Eric Rasmusen, Adam Rennhoff, X. Henry Wang, seminar participants at University of Missouri, the 2011 International Industrial Organization Conference and the 2010 Southern Economic Association Meeting for helpful comments and suggestions.
TACIT COLLUSION WITH LOW-PRICE GUARANTEES*
Article first published online: 2 AUG 2012
© 2012 The Authors. The Manchester School © 2012 John Wiley & Sons Ltd and The University of Manchester
The Manchester School
Volume 81, Issue 5, pages 828–854, September 2013
How to Cite
LIU, Q. (2013), TACIT COLLUSION WITH LOW-PRICE GUARANTEES. The Manchester School, 81: 828–854. doi: 10.1111/j.1467-9957.2012.02316.x
Manuscript received 12.10.11; final version received 22.4.12.
- Issue published online: 12 AUG 2013
- Article first published online: 2 AUG 2012
Existing studies on low-price guarantees (LPGs) typically employ static models and the results are sensitive to modeling assumptions such as the type of guarantees, hassle costs and consumer heterogeneity. In contrast, we employ a fully dynamic model and show that LPGs robustly facilitate tacit collusion, by reducing a deviating firm's immediate deviation profit. This difference of results is because in a static model, any equilibrium has to be immune from any deviation, including infinitesimal deviation. In a dynamic model, however, one can ignore infinitesimal deviations since firms never have an incentive for such deviations.