Question

How the price sentivity impacts the sustainability of cooperative pricing exaplain and example

Answer 1

Cooperative pricing

Prices persist above Cournot, or, Bertrand levels. Cooperative pricing is without formal collusion among firms. Formal collusion is illegal. The equilibrium is the same as if there was explicit collusion. It holds the prices above competitive levels. If the number of sellers is small, as per Chamberlin, each seller recognizes that the profit is short lived. Rivals matching price cuts also makes cooperative pricing possible.

Cooperative pricing depends on the price sensitivity of buyers.

Price sensitivity of buyers, and, sustainability of cooperative pricing

• Sustainability depends on the price sensitivity of buyers.
• If firms undercut the price of a product even by a small amount, it achieves a significant cut in price volume
• A firm is tempted to cut the price; a temporary price cut results in an increase in market share
• Price sensitivity comes from the extent to which a product is horizontally differentiated
• At equal prices, if consumers prefer different products, then the products are horizontally differentiated
• In case of a strong horizontal differentiation, price competition is rather soft. For a slight increase in price, consumers will purchase the same product
• Large price cuts are required to increase market share
• Price competition is fierce if the buyers are firms; buyers are firms rather than households. These firms give weight to price differences
• Some consumers highly price sensitive, some are less price sensitive.
• For instance, Ketchup market has segments that are price sensitive, and, a segment of loyal customers
• In case of segmentation due to buyer sensitivity, cooperative pricing is sustainable. It depends on the relative size of less-price sensitive, and, sensitive of consumers