Question

4. Factorsaffectingthesustainabilityofcollusion.ConsideraninfinitelyrepeatedBertrandtrigger pricing game (for example, question 3(e) above). Describe how each of the following conditions would affect the sustainability of a collusive outcome, if at all.

(a) The government’s Competition Commission announces plans to publish a monthly list ofall transactions prices and volumes in this market, in an effort to improve “market transparency” for consumers.

(b) Recent regulations require users of the product to convert to less environmentally- hazardous substitutes over the next five years. At that point, production and sales of this product will be banned.

Answer 1

a) This will increase the sustainability of the collusion. If one player was to cheat and change price or quantity in order to gain at the cost of other, it would show up in the list published by the commission. This will prevent cheating and help preserve the collusion.

b) This will result in the collusion falling apart. Anyway, there is no need of collusion after 5 years. All players know this. So, they are likely to cheat in the 5th year. So, collusion is not possible in 5th year. Everyone is aware of this. So, it is likely they cheat in the previous year, 4th year as well. And so on.. Therefore, it is very likely the collusion falls apart right away.