Tacit collusion under interest rate fluctuations


  • I am grateful to David Levine for invaluable guidance and ideas and Hongbin Cai, John Riley and William Zame for their comments, support and insights. I also want to thank the Editor, Jacques Crémer, two anonymous referees, Anna Aizer, William Brock, Germán Coloma, Walter Cont, Ernesto Dal Bó, Harold Demsetz, Hugo Hopenhayn, Philip Leslie, Herakles Polemarchakis, José Wynne and seminar participants at several universities and conferences for very useful comments and discussions.


Previous literature has shown that demand fluctuations affect the scope for tacit collusion. I study whether discount factor fluctuations can have similar effects. I find that collusion depends not only on the level of the discount factor but also, and more surprisingly, on its volatility. Collusive prices and profits increase with a higher discount factor level, but decrease with its volatility. These results have important implications for empirical studies of collusive pricing, the role that collusive pricing may play in economic cycles and the study of cooperation in repeated games.