 |
This paper explores the impact of time inconsistency on the optimal trigger pricing strategies of a cartel. Time inconsistency on the part of firms is modelled by using hyperbolic discounting and we focus on β − δ preferences, where β < 1 in order to mimic the effect of the hyperbolic discount parameter. The case where β = 1 is well known and conforms to firms using exponential discounting. Green and Porter (1984) and Porter (1983) have shown for this case that trigger price strategies lead to a cartel in which cartel pricing is separated by periodic price wars between its members. Overall we find that there is a critical threshold value β(δ), which is decreasing in δ. For β ≥ β(δ), there exists an optimal trigger strategy for the cartel featuring lower prices, higher output and periodic price wars. The duration of the price war increases as β decreases until the cartel collapses at a point where β < β(δ). Surprisingly, the trigger price decreases as β decreases.
