22 Small number of firms Easier to achieve coordination with fewer players

22 small number of firms easier to achieve

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22 Small number of firms Easier to achieve coordination with fewer players Easier to maintain coordination with fewer players Gain to stealing market share (may be) smaller with fewer players a cooperator gets ( π m / N) while a deviator gets π l
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23 Transparency of prices Secret price cuts allow firms to deviate with less threat of punishment... in the extreme case there may be no way to prevent secret price cutting More generally, anything that makes prices easily observable will make cooperation easier Example Danish Competition Council decides to require concrete producers to publish prices in order to increase competition • Prices increased
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24 Stable demand Fluctuating demand makes it hard to tell who deviated Fluctuating demand means that the optimal prices/ quantities are always changing Firms must not only coordinate on price but coordinate on how to change price
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25 Multimarket contact Suppose two firms each compete in two markets A and B Firms may be able to use the threat of retaliation in market B to sustain cooperation in market A
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26 Symmetric firms / shocks When firms differ greatly in size, costs, etc. coordination is clearly more complex There is also an important additional effect: Suppose a large firm & a small firm are cooperating, and the small firm deviates The large firm may find it very costly to lower its price to punish the small firm, especially since the amount of market share it is taking away is small Knowing this, the small firm may deviate In real markets, we often see a small group of major players keeping prices high and a “competitive fringe” of smaller firms undercutting their prices – Examples?
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27 Strategic moves that soften rivalry
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28 In September 1999, UK customers were “unsettled” by rumors of future price reductions Ford launched the £400,000 “Price Promise” national advertising campaign Under the “Price Promise”, Ford will reimburse any reduction in the recommended retail price difference a.k.a. “Most Favored Customer Clause” The Ford Price Promise
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29 Competitor Price Low High Ford Low 5 5 3 7 Price High 7 3 6 6 Competitor Price Low High Ford Low 5 3.5 3 5.5 Price High 7 3 6 6 Competitor Price Low High Ford Low 3.5 3.5 3 5.5 Price High 5.5 3 6 6 1 - Pricing Rivalry Game. NE
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