Using Bertrand supergames with communication, we study price formation and stability of collusive agreements on experimental duopoly markets. The experimental design consists of three treatments with different costs of communication: zero-cost, low-cost and high-cost. We find that increasing the cost of communication results in a significantly higher price level. Moreover, making communication costly decreases the number of messages, but more importantly, it enhances the stability of collusive agreements. By letting the cost of communication symbolize the presence of an antitrust law that prohibits firms from discussing prices, McCutcheon (1997) presents an interesting application to antitrust policy. The experimental results support her theoretical prediction that antitrust laws might work in the interest of firms.
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Paper provided by Lund University, Department of Economics in its series Working Papers with number
2004:14.
Length: 41 pages Date of creation: 13 Apr 2004 Date of revision:
13 Sep 2004 Publication status: Forthcoming in The Scandinavian Journal of Economics. Handle: RePEc:hhs:lunewp:2004_014
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Find related papers by JEL classification: C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Gary Charness & Martin Dufwenberg, 2006.
"Promises and Partnership,"
Econometrica,
Econometric Society, vol. 74(6), pages 1579-1601, November.
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