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What is Price Wars: A Tool for Collusion about?

Collusion between firms can be sustained through periodic price wars. Price wars occur when demand fluctuates unexpectedly, causing prices to drop below the collusive price. Even though neither firm has cheated by increasing output, they will temporarily expand output and cause a price war to maintain the perception that cheating will be punished and the collusive agreement is being enforced. In this way, price wars paradoxically help firms collude by sustaining their collusive equilibrium.

Author

Linxi Chen

Language

EN