r has a small amount of doubt in his mind as to the motivation of the other player. Suppose A attaches some tiny probability p to B referring- or being committed- to playing the "trigger" strategy. In fact it turns out that even if p is very small, the players will effectively collude until some point towards the end of the game. This occurs because its not worth A detecting in view of the risk that the no-collusive outcome will obtain for the rest of the game, and because B wishes to maintain his reputation for possibly preferring, or being committed to, the "trigger" strategy. Thus even the small degree of doubt about the motivation of one of the players can yield much effective collusion.5. The motives for retaliation. The motives for retaliation differ in three approaches. In the first approach, the price war is a purely self-fulfilling phenomenon. A firm charges a lower price because of its expectations about the similar action from the other one. The signal that triggers such a non-co-operative phase is previous undercutting by one of the firms. The second approach presumes short-run price rigidities; the reaction by one firm to a price cut by another one is motivated by its desire to regain a market share. The third approach (reputation) focuses on intertemporal links that arise from the firm's learning about each other. A firm reacts to a price cut by charging a low price itself because the previous price cut has conveyed the information that its opponent either has a low cost or cannot be trusted to sustain collusion and is therefore likely to charge relatively low prices in the future. 6. Conclusion. So far I have discussed the collusion using some simple example with a choice of output levels made by the two firms. But there may be several firms in the industry, and in fact firms have a much broader choice. It may be that their decision variable is price, investment, R&D and advertising. Nevertheless the more or less th...
