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Collusion by Asymmetrically Informed Firms

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  • Kihlstrom, Richard
  • Vives, Xavier

Abstract

We analyze the implementation problem faced by firms when trying to collude in the face of asymmetric information about costs. Assuming that transfer payments are possible, we examine the incentive compatibility and individual rationality constraints that must be satisfied by any cartel agreement. Two scenarios are considered. Firms may or may not withdraw from the agreement after each firm's costs become known. If no withdrawal is possible, we find that the monopoly rule is implementable when weak types of individual rationality constraints are required. This contrasts with some results in the literature. If withdrawal is possible, we find a potential conflict between different forms of individual rationality constraints, in particular, between interim and ex post constraints. This conflict disappears in industries with a large number of firms. Copyright 1992 by MIT Press.

Suggested Citation

  • Kihlstrom, Richard & Vives, Xavier, 1992. "Collusion by Asymmetrically Informed Firms," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(2), pages 371-396, Summer.
  • Handle: RePEc:bla:jemstr:v:1:y:1992:i:2:p:371-96
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    Cited by:

    1. Thijssen, J.J.J., 2003. "Investment under uncertainty, market evolution and coalition spillovers in a game theoretic perspective," Other publications TiSEM 672073a6-492e-4621-8d4a-0, Tilburg University, School of Economics and Management.
    2. Susan Athey & Kyle Bagwell & Chris Sanchirico, 2004. "Collusion and Price Rigidity," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 317-349.
    3. Jeanine Miklós-Thal, 2011. "Optimal collusion under cost asymmetry," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 46(1), pages 99-125, January.
    4. Mark Gradstein, 1994. "Implementation of social optimum in oligopoly," Review of Economic Design, Springer;Society for Economic Design, vol. 1(1), pages 319-326, December.
    5. Ferreira, José Luis & Herguera, Iñigo, 1999. "Régimen institucional del mercado spot y del mercado de futuros en distintos países," DE - Documentos de Trabajo. Economía. DE 3892, Universidad Carlos III de Madrid. Departamento de Economía.
    6. Lee, Gea M., 2010. "Optimal collusion with internal contracting," Games and Economic Behavior, Elsevier, vol. 68(2), pages 646-669, March.
    7. Cramton, Peter C & Palfrey, Thomas R, 1990. "Cartel Enforcement with Uncertainty about Costs," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(1), pages 17-47, February.
    8. Joao Correia-da-Silva, 2013. "Impossibility of market division with two-sided private information about production costs," FEP Working Papers 490, Universidade do Porto, Faculdade de Economia do Porto.
    9. Wang, Gyu Ho, 2000. "Regulating an oligopoly with unknown costs," International Journal of Industrial Organization, Elsevier, vol. 18(5), pages 813-825, July.
    10. Labrecciosa Paola & Colombo Luca, 2010. "Technology Uncertainty and Market Collusion," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-17, March.
    11. Orbay, Benan Zeki & Orbay, Hakan, 2003. "Talmudic division as a cartel rule," Journal of Economics and Business, Elsevier, vol. 55(2), pages 167-175.
    12. Laffont, Jean Jacques, 1997. "Collusion et information asymétrique," L'Actualité Economique, Société Canadienne de Science Economique, vol. 73(4), pages 595-609, décembre.
    13. de Roos, Nicolas, 2006. "Examining models of collusion: The market for lysine," International Journal of Industrial Organization, Elsevier, vol. 24(6), pages 1083-1107, November.
    14. Verouden, V.C.H.M., 2001. "Essays in antitrust economics," Other publications TiSEM 6e4ad3c9-8c24-479c-aea2-6, Tilburg University, School of Economics and Management.
    15. João Correia-da-Silva & Joana Pinho, 2011. "Costly horizontal differentiation," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 10(3), pages 165-188, December.
    16. John Roberts, 2008. "Susan C. Athey: John Bates Clark Award Winner 2007," Journal of Economic Perspectives, American Economic Association, vol. 22(4), pages 181-198, Fall.
    17. Gea M. Lee, 2004. "Collusion with Internal Contracting," Econometric Society 2004 Far Eastern Meetings 693, Econometric Society.

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