IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper

Collusion with Persistent Cost Shocks

  • Susan Athey
  • Kyle Bagwell

We consider a dynamic Bertrand game in which prices are publicly observed and each firm receives a privately observed cost shock in each period. Although cost shocks are independent across firms, within a firm costs follow a first-order Markov process. We analyze the set of collusive equilibria available to firms, emphasizing the best collusive scheme for the firms at the start of the game. In general, there is a trade-off between productive efficiency, whereby the low-cost firm serves the market in a given period, and high prices. We show that when costs are perfectly correlated over time within a firm, if the distribution of costs is log-concave and firms are sufficiently patient, then the optimal collusive scheme entails price rigidity: firms set the same price and share the market equally, regardless of their respective costs. When serial correlation of costs is imperfect, partial productive efficiency is optimal. For the case of two cost types, first-best collusion is possible if the firms are patient relative to the persistence of cost shocks, but not otherwise. We present numerical examples of first-best collusive schemes. Copyright Copyright 2008 by The Econometric Society.

(This abstract was borrowed from another version of this item.)

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://kuznets.fas.harvard.edu/~athey/CollusionPersistent.pdf
Download Restriction: no

Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 321307000000000898.

as
in new window

Length:
Date of creation: 14 Mar 2007
Date of revision:
Handle: RePEc:cla:levrem:321307000000000898
Contact details of provider: Web page: http://www.dklevine.com/

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Harold L. Cole & Narayana R. Kocherlakota, 1997. "Dynamic games with hidden actions and hidden states," Working Papers 583, Federal Reserve Bank of Minneapolis.
  2. Kennan, J., 1997. "Repeated Bargaining with Persistent Private Information," Working papers 9708, Wisconsin Madison - Social Systems.
  3. Fernandes, Ana & Phelan, Christopher, 2000. "A Recursive Formulation for Repeated Agency with History Dependence," Journal of Economic Theory, Elsevier, vol. 91(2), pages 223-247, April.
  4. Kyle Bagwell, 2004. "Collusion and Price Rigidity," Theory workshop papers 658612000000000081, UCLA Department of Economics.
  5. Milgrom, Paul & Roberts, John, 1982. "Predation, reputation, and entry deterrence," Journal of Economic Theory, Elsevier, vol. 27(2), pages 280-312, August.
  6. Drew Fudenberg & David K. Levine & Eric Maskin, 1994. "The Folk Theorem with Imperfect Public Information," Levine's Working Paper Archive 2058, David K. Levine.
  7. Skrzypacz, Andrzej & Hopenhayn, Hugo, 2004. "Tacit collusion in repeated auctions," Journal of Economic Theory, Elsevier, vol. 114(1), pages 153-169, January.
  8. Green, Edward J & Porter, Robert H, 1984. "Noncooperative Collusion under Imperfect Price Information," Econometrica, Econometric Society, vol. 52(1), pages 87-100, January.
  9. George J. Mailath, 1989. "Simultaneous Signaling in an Oligopoly Model," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 417-427.
  10. Jean-Jacques Laffont & Jean Tirole, 1985. "The Dynamics of Incentive Contracts," Working papers 397, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. McAfee, R Preston & McMillan, John, 1992. "Bidding Rings," American Economic Review, American Economic Association, vol. 82(3), pages 579-99, June.
    • McAfee, R. Preston & McMillan, John., 1990. "Bidding Rings," Working Papers 726, California Institute of Technology, Division of the Humanities and Social Sciences.
  12. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414.
  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. Michihiro Kandori & Ichiro Obara, 2006. "Efficiency in Repeated Games Revisited: The Role of Private Strategies," Econometrica, Econometric Society, vol. 74(2), pages 499-519, 03.
  15. Kreps, David M. & Wilson, Robert, 1982. "Reputation and imperfect information," Journal of Economic Theory, Elsevier, vol. 27(2), pages 253-279, August.
  16. Paul Milgrom & Ilya Segal, 2002. "Envelope Theorems for Arbitrary Choice Sets," Econometrica, Econometric Society, vol. 70(2), pages 583-601, March.
  17. Susan Athey & Kyle Bagwell, 1999. "Optimal Collusion with Private Information," Working papers 99-17, Massachusetts Institute of Technology (MIT), Department of Economics.
  18. Chakrabarti, Subir K., 2001. "Information Revelation and Collusion in Oligopolies with Unknown Costs," Working Papers 01-02, Cornell University, Center for Analytic Economics.
  19. Marco Battaglini, 2003. "Long-Term Contracting with Markovian Consumers," Theory workshop papers 505798000000000048, UCLA Department of Economics.
  20. Dilip Abreu & David Pearce, 2003. "A Behavioral Model of Bargaining with Endogenous Types," Cowles Foundation Discussion Papers 1446, Cowles Foundation for Research in Economics, Yale University.
  21. Eric Maskin & John Riley, 2000. "Asymmetric Auctions," Review of Economic Studies, Oxford University Press, vol. 67(3), pages 413-438.
  22. D. Abreu & F. Gul, 1998. "Bargaining and Reputation," Princeton Economic Theory Papers 00s9, Economics Department, Princeton University.
  23. Joel Watson, 1999. "Starting Small and Commitment," Cowles Foundation Discussion Papers 1217, Cowles Foundation for Research in Economics, Yale University.
  24. Ariel Pakes & Chaim Fershtman, 2004. "Finite State Dynamic Games with Asymmetric Information: A Computational Framework," 2004 Meeting Papers 41, Society for Economic Dynamics.
  25. Spulber, Daniel F, 1995. "Bertrand Competition When Rivals' Costs Are Unknown," Journal of Industrial Economics, Wiley Blackwell, vol. 43(1), pages 1-11, March.
  26. John McMillan, 1991. "Dango: Japan'S Price-Fixing Conspiracies," Economics and Politics, Wiley Blackwell, vol. 3(3), pages 201-218, November.
  27. Aoyagi, Masaki, 2003. "Bid rotation and collusion in repeated auctions," Journal of Economic Theory, Elsevier, vol. 112(1), pages 79-105, September.
  28. Abreu, Dilip & Pearce, David & Stacchetti, Ennio, 1986. "Optimal cartel equilibria with imperfect monitoring," Journal of Economic Theory, Elsevier, vol. 39(1), pages 251-269, June.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cla:levrem:321307000000000898. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (David K. Levine)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.