Working Paper Series
Private Observation, Tacit Collusion and Collusion with Communication
Abstract: The paper studies the role of communication in
facilitating collusion. The situation of infinitely repeated Cournot
competition in the presence of antitrust enforcement is considered. Firms
observe only their own production levels and a common market price. The
price is assumed to have a stochastic component, so that a low price may
signal either deviations from collusive output levels or a 'downward'
demand shock. The firms choose between tacit collusion and collusion with
communication. Communication implies that the firms meet and exchange
information about past outputs and is assumed to be the only legal proof of
cartel behavior. The antitrust enforcement takes the form of an exogenous
probability to detect the meetings, in which case the firms are sued for
cartel behavior and pay a fine. Tacit collusion is assumed to provide no
grounds for the legal action but involves inefficiencies due to the lack of
complete information about individual output levels. It is shown that there
exists a range of discount factors where collusion with communication
constitutes the most profitable collusive strategy.
Keywords: Collusion; Communication; Private Information; (follow links to similar papers)
JEL-Codes: D82; L41; (follow links to similar papers)
32 pages, October 25, 2006
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