Collusion, price dispersion and fringe competition

We study the optimal behaviour of a cartel faced with fringe competition and imperfectly attentive consumers. Intertemporal price dispersion obfuscates consumer price comparison which aids the cartel through two channels: it reduces the effectiveness of free riding by the fringe; and it relaxes the cartel's internal incentive constraints. Our theory provides a collusive rationale for sales and Edgeworth cycles, explains the survival of a price-setting cartel in a homogeneous product market, and characterises the cartel's manipulation of its fringe rival through a simple cut-off rule.