Department of Economics. University of Melbourne. Parkville Victoria
3052 Australia
ABSTRACT
In an oligopoly supergame, firms' actions in prices and quantities are subject to non-negativity constraints. These constraints can obstruct the practicability of optimal punishment (a la Abreu (1986), Lambson (1987), and Hackner (1996)) in sustaining tacit collusion. Noting that the prospect of single-period optimal punishment depends indispensably upon firms' ability to charge prices strictly below marginal costs (loss-making pricing), under the presence of positive price constraints, marginal costs can serve as a "fudge" to materialise single-period optimal punishment. In this paper we characterise the effects of profit-cost ratios (or mark-ups) on the sustainability of tacit collusion, in light of optimal punishment.
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