Cartel pricing dynamics with reference-dependent preferences

•Cartel pricing dynamics when consumers have reference-dependent preferences.•Consumers are unsure whether a high price is due to collusion or high cost.•High prices increase consumers' belief that firms collude.•Collusive prices rise over time alongside consumers' price expectations.•Collusive prices reach a steady-state when consumers are sure that firms collude.

This paper characterizes cartel pricing dynamics when consumers have reference-dependent preferences. Firms have a common discount factor unknown to consumers and a common cost i.i.d. over time. Consumers observe prices over time and update their expectations about firms' ability to collude, which affects consumers' price expectations. Reference-dependent preferences make consumers lose utility when the actual price is higher than the expected one, which forces colluding firms to raise prices alongside consumers' price expectations. This increasing price path is capped by the price arising when consumers are sure that firms collude.