Collusive Price Leadership (Classic Reprint)

Collusive Price Leadership (Classic Reprint)

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Excerpt from Collusive Price Leadership

In many industries pricing is characterized by price leadership: one of the firms announces a price change in advance of the date at which the new price will take effect and the new price is swiftly matched By the other firms in the industry. Strikingly, a long time elapses between price changes (often a year or more) and price changes arc usually matched to the penny even when the products are differentiated.

Examples of this pattern of pricing behavior abound. Perhaps the best known example occurred in the cigarette industry in the late 1920's and early 1930's. For instance, on October 4, 1929 Reynolds announced an increase in its price from $6.00 to $6.40 per thousand (effective the October 5) and was followed the next day by both of its major competitors, Liggett and Meyers and American Tobacco. That price was in effect for almost two years before Reynolds led a further increase (to $6.85). Similar pricing behavior has been documented in the steel, dynamite, anthracite and airline industries.

Markham (1951) suggests that this pattern of pricing is "price leadership in lieu of overt collusion". That is, since meetings in "smoke-filled rooms" to reach price agreements violate the antitrust laws, firms use these public announcements to achieve collusive pricing coordination. Despite the ubiquity of the pricing pattern and the importance of the collusive interpretation, there has been no attempt to examine the economic properties of collusive price leadership. This paper is devoted to a theoretical investigation of those properties and an empirical study of a recent example in the airline industry.

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