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Robust Collusion with Private Information

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  • David A. Miller

Abstract

The game-theoretic literature on collusion has been hard pressed to explain why a cartel should engage in price wars, without resorting to either impatience, symmetry restrictions, inability to communicate, or failure to optimize. This paper introduces a new explanation that relies on none of these assumptions: if the cartel's member firms have private information about their costs, price wars can be optimal in the face of complexity. Specifically, equilibria that are robust to pay-off irrelevant disruptions of the information environment generically cannot attain or approximate efficiency. An optimal robust equilibrium must allocate market shares inefficiently and may call for price wars under certain conditions. For a two-firm cartel, cost interdependence is a sufficient condition for price wars to arise in an optimal robust equilibrium. That optimal equilibria are inefficient generically applies not only to collusion games but also to the entire separable pay-off environment--a class that includes most typical economic models. Copyright 2012, Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 79 (2012)
Issue (Month): 2 ()
Pages: 778-811

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Handle: RePEc:oup:restud:v:79:y:2012:i:2:p:778-811

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Cited by:
  1. Alberto Martin & Wouter Vergote, 2005. "On the role of retaliation in trade agreements," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 914, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2008.
  2. Joao Correia-da-Silva, 2013. "Impossibility of market division with two-sided private information about production costs," FEP Working Papers, Universidade do Porto, Faculdade de Economia do Porto 490, Universidade do Porto, Faculdade de Economia do Porto.
  3. Yuliy Sannikov & Andrzej Skrzypacz, 2004. "Impossibility of Collusion under Imperfect Monitoring with Flexible Production," 2004 Meeting Papers, Society for Economic Dynamics 418, Society for Economic Dynamics.
  4. Susan Athey & Ilya Segal, 2007. "An Efficient Dynamic Mechanism," Levine's Bibliography 122247000000001134, UCLA Department of Economics.
  5. Yuichi Yamamoto, 2013. "Individual Learning and Cooperation in Noisy Repeated Games," PIER Working Paper Archive, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania 13-038, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  6. Andreas Blume, 2011. "Dynamic Coordination Via Organizational Routines," Working Papers, University of Pittsburgh, Department of Economics 439, University of Pittsburgh, Department of Economics, revised Jan 2011.
  7. Martin, Alberto & Vergote, Wouter, 2004. "Antidumping: Welfare Enhancing Retaliation?," MPRA Paper 5416, University Library of Munich, Germany.
  8. Yuichi Yamamoto, 2012. "Individual Learning and Cooperation in Noisy Repeated Games," PIER Working Paper Archive, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania 12-044, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  9. Vinicius Carrasco & Gustavo Manso, 2006. "Syndication and Robust Collusion in Financial Markets," Textos para discussão, Department of Economics PUC-Rio (Brazil) 522, Department of Economics PUC-Rio (Brazil).
  10. Heidhues, Paul & Blume, Andreas & Franco, April, 2013. "Dynamic Coordination via Organizational Routines," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order, Verein für Socialpolitik / German Economic Association 80027, Verein für Socialpolitik / German Economic Association.
  11. Kleiner, Andreas & Drexl, Moritz, 2013. "Why Voting? A Welfare Analysis," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order, Verein für Socialpolitik / German Economic Association 79886, Verein für Socialpolitik / German Economic Association.

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