Collusion under imperfect monitoring with asymmetric firms
journal contributionposted on 10.01.2017, 12:00 by Luke GarrodLuke Garrod, Matthew Olczak
We explore the effects of asymmetries in capacity constraints on collusion where market demand is uncertain and where firms must monitor the agreement through their privately observed sales and prices. In this private monitoring setting, we show that all firms can infer when at least one firm's sales are below some firm-specific \trigger level". This public information ensures that firms can detect deviations perfectly if fluctuations in market demand are sufficiently small. Otherwise, there can be collusion under imperfect public monitoring where punishment phases occur on the equilibrium path. We find that symmetry facilitates collusion. Yet, we also show that if the fluctuations in market demand are sufficiently large, then the optimal collusive prices of symmetric capacity distributions are actually lower on average than the competitive prices of asymmetric capacity distributions. We draw conclusions for merger policy.
- Business and Economics