NCJ Number
106571
Date Published
1985
Length
25 pages
Annotation
The paper demonstrates that when uninformed consumers rely on past market prices when searching for a low price on a product, a producer cartel can strategically manipulate the consumers and create market entry barriers.
Abstract
Markets are examined in which firms' costs are stochastic and serially correlated over time. Period costs can be low or high, and when a firm's costs are low in a particular period they are more likely to be low again in the following period. Two cost paradigms are considered. In one, the chance of a firm being low in cost is small, but serial correlation is high, so that it is likely to remain low. In the other, chances of the cost being low are small, but serial correlation is low, so that there is only a slightly better than average chance that they will remain low. In the first case, a producer cartel fearing entry will encourage consumer search. In the second, the cartel will discourage search because the more consumers search, the more likely they are to buy elsewhere. To reduce search, the cartel can simply reduce the variance in price or quality by imposing price and quality standards on its members.