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Cheating and compensation in price-fixing cartels

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  • Do, Jihwan

Abstract

This paper provides a theoretical explanation of “cheating and compensation on-path of play” using a canonical repeated game model of price-fixing collusion. The novel mechanism relies on firms playing mixed strategies allowing for both the monopoly price and undercutting the monopoly price to happen with positive probability, together with a compensation scheme that punishes a price-cutter. For an intermediate range of discount factors, the mechanism is optimal in a restricted class of equilibria, and such price-cutting and compensation are necessary parts for any symmetric collusive equilibrium.

Suggested Citation

  • Do, Jihwan, 2022. "Cheating and compensation in price-fixing cartels," Journal of Economic Theory, Elsevier, vol. 200(C).
    • Handle: RePEc:eee:jetheo:v:200:y:2022:i:c:s002205312100199x
    DOI: 10.1016/j.jet.2021.105382
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    More about this item

    Keywords

    Collusion; Oligopoly; Repeated game; Price-cutting; Compensation scheme;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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