Tacit Collusion Under Interest Rate Fluctuations

47 Pages Posted: 28 Nov 2001

See all articles by Pedro Dal Bo

Pedro Dal Bo

Brown University - Department of Economics

Date Written: January 12, 2002


In contrast to the existing literature on repeated games that assumes a fixed discount factor, I study an environment in which it is more realistic to assume a fluctuating discount factor. In a repeated oligopoly, as the interest rate changes, so too does the degree to which firms discount the future. I characterize the optimal tacit collusion equilibrium when the discount factor changes over time, under both price and quantity competition, and I show that collusive prices and profits depend not only on the level of the discount factor but also on its volatility. Collusive prices and profits increase with a higher discount factor level, but decrease with its volatility. These results have important implications not only for the study of cooperation in repeated games but also for empirical studies of collusive pricing and the role that collusive pricing may play in economic cycles.

Keywords: tacit collusion, interest rate, random discount factor, repeated games

JEL Classification: C7, D43, L13

Suggested Citation

Dal Bo, Pedro, Tacit Collusion Under Interest Rate Fluctuations (January 12, 2002). Available at SSRN: https://ssrn.com/abstract=291819 or http://dx.doi.org/10.2139/ssrn.291819

Pedro Dal Bo (Contact Author)

Brown University - Department of Economics ( email )

64 Waterman Street
Providence, RI 02912
United States
401-863-2953 (Phone)
401-863-1970 (Fax)

HOME PAGE: http://www.econ.brown.edu/fac/Pedro_Dal_Bo/

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