Surcharging as a Facilitating Practice

This paper shows how separately itemised surcharges potentially facilitate collusion during a temporary marginal cost shock if firms commit to their duration. A duopoly model with price matching punishments shows that if firms set higher prices they only receive punishment during the shock because they expect prices to fall in the future regardless of a deviation. When it is likely that costs will fall in the future the price matching punishment is too small to increase prices, so firms maintain rigid prices. When it is unlikely that costs will fall the punishment is harsh enough to sustain marginally higher supracompetive prices. However, if firms commit to surcharges for the shock's duration they are able to set even higher prices, because surcharges effectively commit firms to a price decrease and so threaten a harsher punishment after the cost shock has ended