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

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

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

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

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

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?

27 Strategic moves that soften rivalry

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

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