Certain jurisdictions impose restrictions on gasoline pricing. Explore those effects of such restrictions on the sustainability of collusion.

Consider an example of an infinitely repeated game between two firms who produce homogeneous products and set prices simultaneously each period. Each period the monopoly price is given by pM and marginal cost is c. Each firm has a discount factor given by in the interval (0,1). The monopoly profit is given by M.

(a) The province of Quebec has a price floor on gasoline. Suppose in the example described above, firms must set prices no lower than p>c. You may assume that firms follow the law, so that only prices equal to or greater than p are feasible. You may assume that p

How does an increase in p change the range of discount factors for which collusion at the monopoly price is sustainable, using the Nash Equilibrium of the static game every period forever as punishment?

(b) Provinces in Atlantic Canada impose price ceilings on gasoline. Suppose in the example that firms may not set prices higher than p*, where p*

(c) In certain countries, retail gasoline stations are only allowed to set prices once per day. In the example in the beginning of the question, suppose that each day there are two periods: morning and afternoon. Market demand is the same in the morning and the afternoon. Is collusion more sustainable when firms set prices simultaneously each period, or when firms set prices simultaneously each morning and must maintain these prices in the afternoon (that is, they can only adjust price every two periods)?