Pricing strategy and collusion in a market with delay sensitivity

Collusion describes a situation in which firms coordinate their strategies to increase their profit compared with the competitive outcome. In this work, we explore the incentives and ability of service providers, serving delay-sensitive customers to form a cartel. To do so, we develop an infinitely repeated game in which two service providers, each modeled as an M/M/1 queue, interact in the market repeatedly. We demonstrate that the incentives to collude depend on the competitive landscape in the market. When the competition in the market is high the incentives to form a cartel are strong since the cartel allows the service providers to extract all the surplus from the customers. However, operating under these market conditions does not imply that the ability to collude exists as well. We discuss the effect of market parameters such as delay sensitivity, service value and capacity level on the ability of the service providers to collude. We show that a high service value, high delay sensitivity and asymmetric capacity levels can actually hurt the service providers as they may impede their ability to form the cartel. We further discuss the welfare implications of collusive behavior, and the way it affects the incentives to invest in capacity.