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Implicit Collusion in Non-Exclusive Contracting under Adverse Selection

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  • Seungjin Han

Abstract

This paper studies how implicit collusion may take place through simple non-exclusive contracting under adverse selection when multiple buyers (e.g., entrepreneurs with risky projects) non-exclusively contract with multiple firms (e.g., banks). It shows that any price schedule can be supported as equilibrium terms of trade in the market if each firm's expected pro t is no less than its reservation profit. Firms sustain collusive outcomes through the triggering trading mechanism in which they change their terms of trade contingent only on buyers' reports on the lowest average price that the deviating firm's trading mechanism would induce. It suggests that a good can be overpriced in a competitive market even with fully rational traders and without firms' explicit collusive agreement.

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File URL: http://socserv.mcmaster.ca/econ/rsrch/papers/archive/2012-15.pdf
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Bibliographic Info

Paper provided by McMaster University in its series Department of Economics Working Papers with number 2012-15.

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Length: 24 pages
Date of creation: Nov 2012
Date of revision: Apr 2013
Handle: RePEc:mcm:deptwp:2012-15

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Keywords: collusion; non-exclusive contracting; competing mechanisms;

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References

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  1. Giacomo Calzolari & Alessandro Pavan, 2007. "Truthful Revelation Mechanisms for Simultaneous Common Agency Games," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1458, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Mariotti, Thomas & Salanié, François & Attar, Andrea, 2014. "Nonexclusive competition under adverse selection," Theoretical Economics, Econometric Society, Econometric Society, vol. 9(1), January.
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  5. Gerald D. Jaynes, 2011. "Equilibrium and Strategic Communication in the Adverse Selection Insurance Model," Levine's Working Paper Archive 786969000000000243, David K. Levine.
  6. Calzolari, Giacomo & Pavan, Alessandro, 2007. "Sequential Contracting with Multiple Principals," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6562, C.E.P.R. Discussion Papers.
  7. Han, Seungjin, 2004. "Menu Theorems for Bilateral Contracting," Microeconomics.ca working papers, Vancouver School of Economics han-04-01-29-10-05-13, Vancouver School of Economics, revised 29 Jan 2004.
  8. Michael Peters, 1999. "Common Agency and the Revelation Principle," Working Papers, University of Toronto, Department of Economics peters-99-01, University of Toronto, Department of Economics.
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  12. Peters, Michael & Troncoso-Valverde, Cristian, 2010. "A Folk Theorem for Competing Mechanisms," Microeconomics.ca working papers, Vancouver School of Economics michael_peters-2010-17, Vancouver School of Economics, revised 19 Oct 2013.
  13. Biais, Bruno & Martimort, David & Rochet, Jean-Charles, 1998. "Competing Mechanisms in a Commun Value Environment," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 75, Institut d'Économie Industrielle (IDEI), Toulouse.
  14. Epstein, Larry G. & Peters, Michael, 1999. "A Revelation Principle for Competing Mechanisms," Journal of Economic Theory, Elsevier, Elsevier, vol. 88(1), pages 119-160, September.
  15. Andrea Attar & Thomas Mariotti & François Salanié, 2011. "Nonexclusive Competition in the Market for Lemons," Econometrica, Econometric Society, Econometric Society, vol. 79(6), pages 1869-1918, November.
  16. Han, Seungjin, 2007. "Strongly robust equilibrium and competing-mechanism games," Journal of Economic Theory, Elsevier, Elsevier, vol. 137(1), pages 610-626, November.
  17. Laurence Ales & Pricila Maziero, 2009. "Adverse Selection and Non-Exclusive Contracts," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 2010-E61, Carnegie Mellon University, Tepper School of Business.
  18. Jaynes, Gerald D., 2011. "Equilibrium and Strategic Communication in the Adverse Selection Insurance Model," Working Papers, Yale University, Department of Economics 91, Yale University, Department of Economics.
  19. Attar, Andrea & Campioni, Eloisa & Piaser, Gwenaël, 2013. "Two-sided communication in competing mechanism games," Journal of Mathematical Economics, Elsevier, vol. 49(1), pages 62-70.
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  21. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 84(3), pages 488-500, August.
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