Previous theoretical explanations for retail price fixity show that fixed retail prices can be consistent with either competitive or imperfectly competitive behavior. We develop a conceptual model of retail pricing wherein fixed price points are facilitating mechanisms for tacit collusion. A non‐cooperative equilibrium in fixed retail prices is supported through credible threats to revert to Nash pricing if cheating is suspected. We test the implications of this model using a two‐stage, ordered probit approach in weekly supermarket pricing data. The results show that price fixity does support collusive equilibria among retailers, but other factors may also explain retail price behavior.
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Richards et al. (2005) studied this question.