Silence is golden: communication, silence, and cartel stability

Basuchoudhary, Atin and Conlon, John R. (2013): Silence is golden: communication, silence, and cartel stability.

Abstract

This paper studies how cartel stability is influenced by asymmetric information and communication about demand. Firms in a cartel face fluctuating demand in a repeated game framework. In each period, one randomly chosen firm knows current demand. In this context we consider two different equilibria -- one where the informed firm communicates its information to its partners and another where it does not. We show that cartels are extremely unstable when the informed firm communicates with the uninformed firms. However, when the informed firm does not communicate with the uninformed firms cartels can be as stable as when there are no demand fluctuations at all.

• Item Type: MPRA Paper
• Language: English
• Keywords: cartels; communication; stability
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C72 - Noncooperative Games; L - Industrial Organization > L0 - General > L00 - General

References

Abreu, D. 1988. "On the Theory of Infinitely Repeated Games with Discounting." Econometrica 56:383-396.

Abreu, D. 1986. "Extremal Equilibria of Oligopolistic Supergames." Journal of Economic Theory 39:191-225.

Abreu, D., D. Pearce, and E. Stacchetti. 1986. "Optimal Cartel Equilibria with Imperfect Monitoring." Journal of Economic Theory 39:251-69.

Aoyagi, M., 2002. "Collusion in Dynamic Bertrand Oligopoly With Correlated Private Signals and Communication." Journal of Economic Theory 102:229-248.

Athey, S., and Bagwell, K., 2001. "Optimal Collusion With Private Information." RAND Journal of Economics 32:428-465.

Athey, S., Bagwell, K., and Sanchirico C., 2004. "Collusion and Price Rigidity." Review of Economic Studies 71: 317-349.

Bagwell, K., and R.W. Staiger. 1997. "Collusion Over the Business Cycle." RAND Journal of Economics 28:82-106.

Borenstein, S., and A. Shepard. 1996. "Dynamic Pricing in Retail Gasoline Markets." RAND Journal of Economics 25: 429-451.

Chevalier, J.A., and D.S. Scharfstein. 1996. "Capital Market Imperfections and Countercyclical Markups: Theory and Evidence." American Economic Review 86:703-725.

Choi, D. and G.C. Philippatos. 1983. "Financial Consequences of Antitrust Enforcement." Review of Economics and Statistics 65:501-506.

Compte, O. 1998. "Communication in Repeated Games With Imperfect Private Monitoring." Econometrica 66:597-626.

Conlon, J. 1996. "Cooperation for Pennies: A Note on ε-Equilibria." Journal of Economic Theory 70:489-500.

Conlon, J. 2002. "Hope Springs Eternal: Learning and the Stability of Cooperation in Short Horizon Repeated Games." Journal of Economic Theory, forthcoming.

Domowitz, I., R.G. Hubbard, and B.C. Petersen. 1986. "Business Cycles and the Relationship Between Concentration and Price-Cost Margins." RAND Journal of Economics 17:1-17.

Ellison, G. 1994. "Theories of Cartel Stability and the Joint Executive Committee." RAND Journal of Economics 25:37-57.

Feinberg, R.M. 1980. "Antitrust Enforcement and Subsequent Price Behavior." Review of Economics and Statistics 62:609-612.

Fraas, A.G., and D.F. Greer. 1977. "Market Structure and Price Collusion: An Empirical Analysis." The Journal of Industrial Economics 26: 21-45.

Friedman, J. 1971. "A Non-cooperative Equilibrium for Supergames." Review of Economic Studies 38:1-12.

Fudenberg, D., and E. Maskin. 1986. "The Folk Theorem in Repeated Games with Discounting or with Incomplete Information." Econometrica 54:533-554.

Green, E., and R. Porter. 1984. "Noncooperative Collusion Under Imperfect Price Information." Econometrica 52:87-100.

Hay, G.A., and D. Kelley. 1974. "An Empirical Survey of Price Fixing Conspiracies." Journal of Law and Economics 17:13-38.

Hajivassiliou, V.A. 1989. "Testing Game-Theoretic Models of Price-Fixing Behaviour." Cowles Foundation Working Paper #935.

Haltiwanger, J., and J.E. Harrington. 1991. "The Impact of Cyclical Demand Movements on Collusive Behavior." RAND Journal of Economics 22:89-106.

Kandori, M., and H. Matsushima. 1998. "Private Observation, Communication and Collusion." Econometrica 66:627-652.

Kreps, D., P. Milgrom, J. Roberts, and R. Wilson. 1982. "Rational Cooperation in the Finitely Repeated Prisoners Dilemma." Journal of Economic Theory 27:245-252.

Lambson, V.E. 1984. "Self Enforcing Collusion in Large Dynamic Markets." Journal of Economic Theory 34(2) pp. 282-91.

Pecorino, P. 1998. "Is there a Free Rider Problem in Lobbying? Endogenous Tariffs, Trigger Strategies, and the Number of Firms." American Economic Review 88(3) pp. 652-60.

Porter, R.H. 1983. "A Study of Cartel Stability: The Joint Executive Committee, 1880-1886." Bell Journal of Economics 14:301-314.

Reksulak, M., W. F. Shughart II, R.D. Tollison, and A. Basuchoudhary. 2004. "Titan Agonistes: The Wealth Effects of the Standard Oil (N.J.) Case." Research in Law and Economics 21:63--84.

Rotemberg, J.J., and G. Saloner. 1986. "A Supergame-Theoretic Model of Business Cycles and Price Wars During Booms." American Economic Review 76:390-407.

Rotemberg, J.J., and M. Woodford. 1992. "Oligopolistic Pricing and the Effect of Aggregate Demand on Economic Activity." Journal of Political Economy 100:1153-1207.

Segerstrom, P.S. 1985. "Symmetric and Asymmetric Punishments in the Theory of Noncooperative Collusion." Econometrics and Economic Theory Workshop Papers 8504.

Suslow, V.Y. 1998. "Cartel Contract Duration: Empirical Evidence from International Cartels." Working Paper.

Sproul, M.F. 1993. "Anti-trust and Prices." Journal of Political Economy 101:741-754.

Stigler, G.J. and J.K. Kindahl. 1970. The Behavior of Industrial Prices. New York: Columbia University Press.

Town, R.J. 1991. "Price Wars and Demand Fluctuations: A Reexamination of the Joint Executive Committee." U.S. Department of Justice Antitrust Division Discussion Paper EAG91-5.

Vives, X. 1984. "Duopoly Information Equilibrium: Cournot and Bertrand." Journal of Economic Theory 34:71-94.

Vives, X. 1990. "Trade Association Disclosure Rules, Incentives to Share Information, and Welfare." RAND Journal of Economics 21:409-430.

Vives, X. 1999. Oligopoly Pricing: Old Ideas and New Tools. MIT Press, Cambridge, MA.

Whinston, M.D. 2006. Lectures on Antitrust Economics. MIT Press, Cambridge, MA.