Price rigidity and asymmetric price adjustment in a repeated oligopoly

Recent empirical studies suggest that prices in highly concentrated industries tend to be rigid and that pricing is often asymmetric with price rises occurring more frequently than price reductions (DOMBERGER [1957]). Existing explanations of price rigidity and asymmetric pricing assume that firms incur "menu costs" when they adjust their prices. There is, however, little empirical evidence to substantiate this assumption. This paper provides an alternative explanation for price rigidity as well as asymmetric price adjustment in the absence of menu costs. In an infinitely repeated duopoly with incomplete information, it is demonstrated that depending on the degree of collusion and parameters, a variety of pricing behaviour emerge in equilibrium.