Tacit Collusion with Low-Price Guarantees

Abstract

Existing studies on low‐price guarantees (LPGs) typically employ static models and the results are sensitive to modeling assumptions such as the type of guarantees, hassle costs and consumer heterogeneity. In contrast, we employ a fully dynamic model and show that LPGs robustly facilitate tacit collusion, by reducing a deviating firm's immediate deviation profit. This difference of results is because in a static model, any equilibrium has to be immune from any deviation, including infinitesimal deviation. In a dynamic model, however, one can ignore infinitesimal deviations since firms never have an incentive for such deviations.