Optimal Collusion under Cost Asymmetry

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Optimal Collusion under Cost Asymmetry

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Miklos-Thal, Jeanine

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Jeanine Miklós-Thal

Abstract

Cost asymmetry is generally thought to hinder collusion because a more efficient firm has both more to gain from a deviation and less to fear from retaliation than less efficient firms. Our paper reexamines this conventional wisdom and characterizes optimal collusion without any prior restriction on the class of strategies. We first stress that firms can credibly agree on retaliation schemes that maximally punish even the most efficient firm. This implies that whenever collusion is sustainable under cost symmetry, some collusion is also sustainable under cost asymmetry; efficient collusion, however, remains more di¢ cult to sustain when costs are asymmetric. Finally, we show that, in the presence of side payments, cost asymmetry generally facilitates collusion.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 11044.

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Date of creation: 2008
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Handle: RePEc:pra:mprapa:11044

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Find related papers by JEL classification:
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

This paper has been announced in the following NEP Reports:

NEP-ALL-2008-10-21 (All new papers)
NEP-BEC-2008-10-21 (Business Economics)
NEP-COM-2008-10-21 (Industrial Competition)
NEP-MIC-2008-10-21 (Microeconomics)

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Deneckere, R., 1989. "Capacity-Constrained Price Competition When Unit Costs Differ," Purdue University Economics Working Papers 958, Purdue University, Department of Economics.
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Other versions:
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