Intertemporal Bundling and Tacit Collusion

We analyze a symmetric, infinitely-repeated oligopoly price game and show that the level of profits that can be sustained in a subgame perfect Nash equilibrium (SPNE) is higher when firms are able to intertemporally bundle their output. In the absence of intertemporal bundling, it is well known that a SPNE exists that sustains any price and profit, up to the monopoly profit, as long as the number of firms does not exceed 11−δ, or equivalently, the discount factor is greater than n−1n, and that marginal cost pricing is the unique SPNE otherwise. We show that when firms are free to offer intertemporal bundles, equilibria exist in which firms earn strictly positive profits for any number of firms and for any strictly positive discount factor. Firms can earn higher profits by temporally segmenting the market with staggered long-term contracts and by exploiting the fact that consumers anticipate future responses to current deviations. In some cases, firms can earn even higher profits by simultaneously offering intermittent discounts and multi-period contracts. ∗We want to thank George Deltas, Kathryn E. Spier, and Scott Stern for helpful comments. 1