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Tacit Collusion under Fairness and Reciprocity

  • Doruk Iris
  • Luís Santos-Pinto

This paper explores the implications of fairness and reciprocity in dynamic market games. A reciprocal player responds to kind behavior of rivals with unkind actions (destructive reciprocity), while at the same time, it responds to kind behavior of rivals with kind actions (constructive reciprocity). The paper shows that for general perceptions of fairness, reciprocity facilitates collusion in dynamic market games. The paper also shows that this is a robust result. It holds when players' choices are strategic complements and strategic substitutes. It also holds under grim trigger punishments and optimal punishments.

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Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 09.03.

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Length: 23 pages
Date of creation: Oct 2008
Date of revision:
Handle: RePEc:lau:crdeep:09.03
Contact details of provider: Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.20
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  1. Abreu, Dilip, 1988. "On the Theory of Infinitely Repeated Games with Discounting," Econometrica, Econometric Society, vol. 56(2), pages 383-96, March.
  2. Fehr, Ernst & Schmidt, Klaus M., 1999. "A theory of fairness, competition, and cooperation," Munich Reprints in Economics 20650, University of Munich, Department of Economics.
  3. Falk, Armin & Fischbacher, Urs, 2006. "A theory of reciprocity," Games and Economic Behavior, Elsevier, vol. 54(2), pages 293-315, February.
  4. Huck, Steffen & Muller, Wieland & Normann, Hans-Theo, 2001. "Stackelberg Beats Cournot: On Collusion and Efficiency in Experimental Markets," Economic Journal, Royal Economic Society, vol. 111(474), pages 749-65, October.
  5. Georg Kirchsteiger & Martin Dufwenberg, 2004. "A theory of sequential reciprocity," ULB Institutional Repository 2013/5899, ULB -- Universite Libre de Bruxelles.
  6. John Geanakoplos & David Pearce & Ennio Stacchetti, 2010. "Psychological Games and Sequential Rationality," Levine's Working Paper Archive 587, David K. Levine.
  7. Rabin, Matthew, 1997. "Fairness in Repeated Games," Department of Economics, Working Paper Series qt0nz5b4mb, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  8. Christoph Engel, 2006. "How Much Collusion. A Meta-Analysis On Oligopoly Experiments," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2006_27, Max Planck Institute for Research on Collective Goods.
  9. Geanakoplos, John & Pearce, David & Stacchetti, Ennio, 1989. "Psychological games and sequential rationality," Games and Economic Behavior, Elsevier, vol. 1(1), pages 60-79, March.
  10. Axel Ockenfels & Gary E. Bolton, 2000. "ERC: A Theory of Equity, Reciprocity, and Competition," American Economic Review, American Economic Association, vol. 90(1), pages 166-193, March.
  11. Segal, Uzi & Sobel, Joel, 1999. "Tit for Tat: Foundations of Preferences for Reciprocity in Strategic Settings," University of California at San Diego, Economics Working Paper Series qt9xf8836g, Department of Economics, UC San Diego.
  12. Switgard Feuerstein, 2005. "Collusion in Industrial Economics—A Survey," Journal of Industry, Competition and Trade, Springer, vol. 5(3), pages 163-198, December.
  13. Milgrom, Paul & Roberts, John, 1990. "Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities," Econometrica, Econometric Society, vol. 58(6), pages 1255-77, November.
  14. Santos-Pinto, Luís, 2006. "Reciprocity, inequity-aversion, and oligopolistic competition," MPRA Paper 3143, University Library of Munich, Germany, revised 14 Apr 2007.
  15. David Gilo & Yossi Moshe & Yossi Spiegel, 2006. "Partial cross ownership and tacit collusion," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 81-99, 03.
  16. Rabin, Matthew, 1993. "Incorporating Fairness into Game Theory and Economics," American Economic Review, American Economic Association, vol. 83(5), pages 1281-1302, December.
  17. Malueg, David A., 1992. "Collusive behavior and partial ownership of rivals," International Journal of Industrial Organization, Elsevier, vol. 10(1), pages 27-34, March.
  18. Nabil Al-Najjar & Sandeep Baliga & David Besanko, 2008. "Market forces meet behavioral biases: cost misallocation and irrational pricing," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 214-237.
  19. William Neilson, 2006. "Axiomatic reference-dependence in behavior toward others and toward risk," Economic Theory, Springer, vol. 28(3), pages 681-692, 08.
  20. Friedman, James W, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Wiley Blackwell, vol. 38(113), pages 1-12, January.
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