Hidden Surcharges and Tacit Collusion: A Simple Model

Abstract

This paper describes how firms can use hidden surcharges to make tacit collusion easier, in a very simple Bertrand-type competition model with brand loyalty. The firms choose advertised price, and hidden surcharge; the surcharges are unavoidable (such as fuel surcharges added to the ticket price). Advertised prices are observed by everyone; surcharges are observed by competitors and some consumers; consumers make their choice based on the information observable to them. We demonstrate that when market players specify punishment for defecting on the collusive agreement in such a way that undercutting the rival's surcharge rather than advertised price becomes the optimal defection strategy; sustaining the tacitly collusive agreement becomes an easier task. We also show how hidden surcharges can originate within our model's framework as firms' response to an exogenous cost shock, even when most consumers are aware of these hidden fees.