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Tacit Collusion under Fairness and Reciprocity

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  • Doruk İriş

    (Sogang University, School of Economics, 35 Baekbeom-ro, Seoul, South Korea)

  • Luís Santos-Pinto

    ()
    (University of Lausanne, Faculty of Business and Economics, Internef, 535 CH-1015, Lausanne, Switzerland)

Abstract

This paper departs from the standard profit-maximizing model of firm behavior by assuming that firms are motivated in part by personal animosity–or respect–towards their competitors. A reciprocal firm responds to unkind behavior of rivals with unkind actions (negative reciprocity), while at the same time, it responds to kind behavior of rivals with kind actions (positive reciprocity). We find that collusion is easier to sustain when firms have a concern for reciprocity towards competing firms provided that they consider collusive prices to be kind and punishment prices to be unkind. Thus, reciprocity concerns among firms can have adverse welfare consequences for consumers.

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Bibliographic Info

Article provided by MDPI, Open Access Journal in its journal Games.

Volume (Year): 4 (2013)
Issue (Month): 1 (February)
Pages: 50-65

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Handle: RePEc:gam:jgames:v:4:y:2013:i:1:p:50-65:d:23527

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Keywords: fairness; reciprocity; collusion; repeated games;

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References

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  1. Switgard Feuerstein, 2005. "Collusion in Industrial Economics—A Survey," Journal of Industry, Competition and Trade, Springer, vol. 5(3), pages 163-198, December.
  2. Axel Ockenfels & Gary E. Bolton, 2000. "ERC: A Theory of Equity, Reciprocity, and Competition," American Economic Review, American Economic Association, vol. 90(1), pages 166-193, March.
  3. Fehr, Ernst & Schmidt, Klaus M., 1999. "A theory of fairness, competition, and cooperation," Munich Reprints in Economics 20650, University of Munich, Department of Economics.
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  7. Santos-Pinto, Luís, 2006. "Reciprocity, inequity-aversion, and oligopolistic competition," MPRA Paper 3143, University Library of Munich, Germany, revised 14 Apr 2007.
  8. Georg Kirchsteiger & Martin Dufwenberg, 2004. "A theory of sequential reciprocity," ULB Institutional Repository 2013/5899, ULB -- Universite Libre de Bruxelles.
  9. Falk, Armin & Fischbacher, Urs, 2001. "A Theory of Reciprocity," CEPR Discussion Papers 3014, C.E.P.R. Discussion Papers.
  10. M. Rabin, 2001. "Incorporating Fairness into Game Theory and Economics," Levine's Working Paper Archive 511, David K. Levine.
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  14. Christoph Engel, 2006. "How Much Collusion. A Meta-Analysis On Oligopoly Experiments," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2006_27, Max Planck Institute for Research on Collective Goods.
  15. Huck, Steffen & Muller, Wieland & Normann, Hans-Theo, 2001. "Stackelberg Beats Cournot: On Collusion and Efficiency in Experimental Markets," Economic Journal, Royal Economic Society, vol. 111(474), pages 749-65, October.
  16. David Gilo & Yossi Moshe & Yossi Spiegel, 2006. "Partial cross ownership and tacit collusion," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 81-99, 03.
  17. John Geanakoplos & David Pearce & Ennio Stacchetti, 2010. "Psychological Games and Sequential Rationality," Levine's Working Paper Archive 587, David K. Levine.
  18. Segal, Uzi & Sobel, Joel, 2007. "Tit for tat: Foundations of preferences for reciprocity in strategic settings," Journal of Economic Theory, Elsevier, vol. 136(1), pages 197-216, September.
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Citations

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Cited by:
  1. von Siemens, Ferdinand A., 2013. "Intention-based reciprocity and the hidden costs of control," Journal of Economic Behavior & Organization, Elsevier, vol. 92(C), pages 55-65.
  2. Mark Armstrong & Steffen Huck, 2011. "Behavioral Economics as Applied to Firms: A Primer," Antitrust Chronicle, Competition Policy International, vol. 1.
  3. Ferdinand von Siemens, 2011. "Intention-Based Reciprocity and the Hidden Costs of Control," CESifo Working Paper Series 3553, CESifo Group Munich.
  4. Catherine Roux & Christian Thöni, 2013. "Collusion Among Many Firms: The Disciplinary Power of Targeted Punishment," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 13.02, Université de Lausanne, Faculté des HEC, DEEP.
  5. Ferdinand von Siemens, 2011. "Intention-Based Reciprocity and the Hidden Costs of Control," Tinbergen Institute Discussion Papers 11-115/1, Tinbergen Institute.
  6. Ferdinand von Siemens, 2011. "Intention-Based Reciprocity and the Hidden Costs of Control," Tinbergen Institute Discussion Papers 11-115/1, Tinbergen Institute.

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