Collusion under Imperfect Monitoring with Asymmetric Firms

Luke, Garrod and Matthew, Olczak (2016): Collusion under Imperfect Monitoring with Asymmetric Firms.

Abstract

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 faciliates collusion. Yet, we also show that if the fluctuations in market demand are sufficiently large, then the collusive prices of symmetric capacity distributions are actually lower than the competitive prices of asymmetric capacity distributions. We draw conclusions for merger policy.

• Item Type: MPRA Paper
• Language: English
• Keywords: capacity constraints, mergers, collusion, imperfect monitoring
• Subjects: D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; K - Law and Economics > K2 - Regulation and Business Law > K21 - Antitrust Law; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L12 - Monopoly ; Monopolization Strategies; L - Industrial Organization > L4 - Antitrust Issues and Policies > L41 - Monopolization ; Horizontal Anticompetitive Practices

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