Long-lived consumers, intertemporal bundling and collusion

Abstract

In a repeated price game with long but finitely-lived consumers, long-term contracts facilitate collusion. Intertemporal bundling reduces the gains from business stealing but has little effect on the cost of the resulting price war. When consumers anticipate future price wars, the maximum deviation profit is a single period of consumer surplus per consumer. Hence long-term contracts do not increase the incentive to deviate per consumer, but do reduce the the number of consumers currently in the market by locking them into past contracts, so tacit collusion is sustainable for a wider range of discount factors and market structures. © 2011 The Authors. The Journal of Industrial Economics © 2011 Blackwell Publishing Ltd and the Editorial Board of The Journal of Industrial Economics.