Collusion through price ceilings? In search of a focal-point effect

0373121 - NHÚ 2012 RIV NL eng J - Journal Article
Engelmann, Dirk - Müller, W.
Collusion through price ceilings? In search of a focal-point effect.
Journal of Economic Behavior & Organization. Roč. 79, č. 3 (2011), s. 291-302. ISSN 0167-2681. E-ISSN 1879-1751
Institutional research plan: CEZ:AV0Z70850503
Keywords : collusion * competition policy * experimental economics
Subject RIV: AH - Economics
Impact factor: 1.006, year: 2011

The theory of competitive markets predicts that the effect of a price ceiling on the level of prices is either negative (in case the ceiling is binding) or zero (in case the ceiling is at or above the competitive price). Industrial economists such as Scherer and Ross (1990), however, have argued that price ceilings can weaken competition as they may serve as collusive focal points for pricing decisions (Schelling, 1960). To see this, note that the Folk Theorem (see for example Tirole, 1988) predicts that infinitely many prices can occur as outcomes of collusive equilibria in infinitely repeated games if the discount factor is sufficiently high. This suggests a coordination problem when firms attempt to collude. Here, a price ceiling may function as a focal point on which firms coordinate. Thus, price ceilings could facilitate tacit collusion and lead to higher prices.
Permanent Link: http://hdl.handle.net/11104/0206276