Optimal Collusion under Cost Asymmetry
Cost asymmetry is generally thought to hinder collusion because a more efficient firm hasboth less to gain from collusion and less to fear from retaliation. Our paper reexamines thisconventional wisdom and characterizes optimal collusion without any prior restriction on theclass of strategies. We first stress that firms can ”collude” on retaliation schemes that maximallypunish even the most efficient firm. This implies that whenever collusion is sustainable undercost symmetry, some collusion is also sustainable under cost asymmetry; efficient collusion,however, remains more difficult to sustain when costs are asymmetric. Finally, we show that, inthe presence of side payments, cost asymmetry generally facilitates collusion.
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