Collusive Decisions and Punishment under Demand and Cost Uncertainty

Abstract

This paper provides a wider approach to competitive behaviour in sectors affected by a slump in demand, based on the contribution of the original paper by Green and Porter (1984). In addition to the cooperative solution where firms may enter a reversionary episode without breaking the collusion, the model of this study takes into consideration two forms of punishment as a result of future uncertainty; a total breakdown in collusion if there is no trust between its participants; or the formation of a new one by charging a lower common price as a disciplinary act. It is shown that under demand and cost uncertainty firms may have the incentives to choose a different short-run solution compared to the solution under certainty.