Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

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

Ola Andersson () and Erik Wengström ()
Additional contact information
Ola Andersson: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Erik Wengström: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

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

JEL-codes: C90; D43; L40

41 pages, First version: April 13, 2004. Revised: September 13, 2004.

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