Manganelli, Anton Giulio (2012) Cartel Pricing Dynamics, Price Wars and Cartel Breakdown. TSE Working Paper, n. 12-309

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Abstract

This paper gives an unified explanation of some of the most widely known facts of the cartel
literature: prices gradually rise, then remain constant, there can be price wars and some cartels
break down. In this model consumers are loss averse and efficiency of a competitive fringe is not
publicly observable. In the best collusive equilibrium, the price expectation can be so low that loss
aversion makes consumers not buy at the maximal collusive price: firms then set a lower price that
rises in time with consumers’ expectations. This increasing price path is bounded from above by
the presence of the fringe. If the fringe sets a low price during a sufficient number of periods, there
can be price wars and collusion can eventually break down.