COLLUSION PRICE SUSTAINABILITY UNDER DEMAND UNCERTAINTY AND SMOOTH TRANSITION MARKET SHARE

Lorenzo TRAPANI ( Politecnico di Milano )

We analyze the sustainability over time of collusion equilibrium in a two firms market with uncertain demand and risk neutrality, modelling uncertainty under several different distributional assumptions. Expected demand is assumed to be subject to inertia in that a difference between the two firms' prices results in a smooth variation of the market share instead of a discrete 0-1 outcome; demand is modelled as continuous in the price difference and secret price cuts result in the increase of the own market share and profit. We show that when secret price cuts cannot be observed directly and cheating may be inferred only on the ground of the own profit's level, the higher demand uncertainty, the more deviating from collusion equilibrium pays. Under the assumption of trigger strategies and firms employing a tail test based upon a treshold profit level to detect price cuts, we find that strict detection rules result to be less effective than milder ones in order to avoid deviation.