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Implicit Collusion in Non-Exclusive Contracting under Adverse Selection

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  • Han, Seungjin

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 profit 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.socsci.mcmaster.ca/han/research/CNE_7.pdf
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Bibliographic Info

Paper provided by Vancouver School of Economics in its series Microeconomics.ca working papers with number seungjin_han-2011-10.

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Length: 24 pages
Date of creation: 26 May 2011
Date of revision: 02 Apr 2013
Handle: RePEc:ubc:pmicro:seungjin_han-2011-10

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Web page: http://www.economics.ubc.ca/

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

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  11. Hellwig, Martin F., 1988. "A note on the specification of interfirm communication in insurance markets with adverse selection," Journal of Economic Theory, Elsevier, vol. 46(1), pages 154-163, October.
  12. Jaynes, Gerald D., 2011. "Equilibrium and Strategic Communication in the Adverse Selection Insurance Model," Working Papers 91, Yale University, Department of Economics.
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  15. Michael Peters, 1999. "Common Agency and the Revelation Principle," Working Papers peters-99-01, University of Toronto, Department of Economics.
  16. Mariotti, Thomas & Salanié, François & Attar, Andrea, 2014. "Nonexclusive competition under adverse selection," Theoretical Economics, Econometric Society, vol. 9(1), January.
  17. Han, Seungjin, 2006. "Menu theorems for bilateral contracting," Journal of Economic Theory, Elsevier, vol. 131(1), pages 157-178, November.
  18. Jaynes, Gerald David, 1978. "Equilibria in monopolistically competitive insurance markets," Journal of Economic Theory, Elsevier, vol. 19(2), pages 394-422, December.
  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.
  20. Gerald D. Jaynes, 2011. "Equilibrium and Strategic Communication in the Adverse Selection Insurance Model," Levine's Working Paper Archive 786969000000000243, David K. Levine.
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