Scandinavian Working Papers in Economics
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Department of Economics, Lund University Working Papers, Department of Economics, Lund University

No 2004:14:
Do Antitrust Laws Facilitate Collusion? Experimental Evidence on Costly Communication in Duopolies

Ola Andersson () and Erik Wengström ()

Abstract: Using Bertrand supergames with communication, we study price formation and stability of collusive agreements on experimental duopoly markets. The experimental design consists of three treatments with different costs of communication: zero-cost, low-cost and high-cost. We find that increasing the cost of communication results in a significantly higher price level. Moreover, making communication costly decreases the number of messages, but more importantly, it enhances the stability of collusive agreements. By letting the cost of communication symbolize the presence of an antitrust law that prohibits firms from discussing prices, McCutcheon (1997) presents an interesting application to antitrust policy. The experimental results support her theoretical prediction that antitrust laws might work in the interest of firms.

Keywords: Antitrust Policy; Experiments; Collusion; Costly Communication; Weakly Renegotiation-proof Equilibria; (follow links to similar papers)

JEL-Codes: C90; D43; L40; (follow links to similar papers)

41 pages, April 13, 2004, Revised September 13, 2004

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This paper is published as:
Andersson, Ola and Erik Wengström, (2007), 'Do Antitrust Laws Facilitate Collusion? Experimental Evidence on Costly Communication in Duopolies', The Scandinavian Journal of Economics, Vol. 109, No. 2, pages 321-339

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