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Flexibility and Collusion with Imperfect Monitoring

  • Bigoni, Maria
  • Potters, Jan
  • Spagnolo, Giancarlo

Flexibility - the ability to react swiftly to others' choices - facilitates collusion by reducing gains from defection before opponents react. Under imperfect monitoring, however, flexibility may also hinder collusion by inducing punishment after too few noisy signals. The combination of these forces predicts a non-monotonic relationship between flexibility and collusion. To test this subtle prediction we implement in the laboratory an indefinitely repeated Cournot game with noisy price information and vary how long players have to wait before changing output. We find that (i) the facilitating role of flexibility is lost under imperfect monitoring, and (ii) with learning, collusion unravels with low or high flexibility, but not with intermediate flexibility.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8877.

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Date of creation: Mar 2012
Date of revision:
Handle: RePEc:cpr:ceprdp:8877
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  1. repec:cup:cbooks:9780521016919 is not listed on IDEAS
  2. repec:cup:cbooks:9780521816632 is not listed on IDEAS
  3. Yuliy Sannikov & Andrzej Skrzypacz, 2004. "Impossibility of Collusion under Imperfect Monitoring with Flexible Production," 2004 Meeting Papers 418, Society for Economic Dynamics.
  4. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
  5. Roth, Alvin E. & Erev, Ido, 1995. "Learning in extensive-form games: Experimental data and simple dynamic models in the intermediate term," Games and Economic Behavior, Elsevier, vol. 8(1), pages 164-212.
  6. Holcomb, James H. & Nelson, Paul S., 1997. "The role of monitoring in duopoly market outcomes," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 26(1), pages 79-93.
  7. Daniel Friedman & Ryan Oprea, 2012. "A Continuous Dilemma," American Economic Review, American Economic Association, vol. 102(1), pages 337-63, February.
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