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Retail Price Fixity as a Facilitating Mechanism
Author(s) -
Richards Timothy J.,
Patterson Paul M.
Publication year - 2005
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.1111/j.0002-9092.2005.00704.x
Subject(s) - tacit collusion , collusion , cheating , microeconomics , economics , ordered probit , probit model , econometrics , psychology , social psychology
Previous theoretical explanations for retail price fixity show that fixed retail prices can be consistent with either competitive or imperfectly competitive behavior. We develop a conceptual model of retail pricing wherein fixed price points are facilitating mechanisms for tacit collusion. A non‐cooperative equilibrium in fixed retail prices is supported through credible threats to revert to Nash pricing if cheating is suspected. We test the implications of this model using a two‐stage, ordered probit approach in weekly supermarket pricing data. The results show that price fixity does support collusive equilibria among retailers, but other factors may also explain retail price behavior.