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Tacit Collusion under Fairness and Reciprocity

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  • Doruk Iris
  • Luís Santos-Pinto

Abstract

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.

Suggested Citation

  • Doruk Iris & Luís Santos-Pinto, 2008. "Tacit Collusion under Fairness and Reciprocity," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 09.03, Université de Lausanne, Faculté des HEC, DEEP.
  • Handle: RePEc:lau:crdeep:09.03
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    References listed on IDEAS

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    1. Ernst Fehr & Klaus M. Schmidt, 1999. "A Theory of Fairness, Competition, and Cooperation," The Quarterly Journal of Economics, Oxford University Press, vol. 114(3), pages 817-868.
    2. Falk, Armin & Fischbacher, Urs, 2006. "A theory of reciprocity," Games and Economic Behavior, Elsevier, vol. 54(2), pages 293-315, February.
    3. Segal, Uzi & Sobel, Joel, 2007. "Tit for tat: Foundations of preferences for reciprocity in strategic settings," Journal of Economic Theory, Elsevier, vol. 136(1), pages 197-216, September.
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    7. John Geanakoplos & David Pearce & Ennio Stacchetti, 2010. "Psychological Games and Sequential Rationality," Levine's Working Paper Archive 587, David K. Levine.
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    9. Dufwenberg, Martin & Kirchsteiger, Georg, 2004. "A theory of sequential reciprocity," Games and Economic Behavior, Elsevier, vol. 47(2), pages 268-298, May.
    10. Santos-Pinto, Luís, 2006. "Reciprocity, inequity-aversion, and oligopolistic competition," MPRA Paper 3143, University Library of Munich, Germany, revised 14 Apr 2007.
    11. 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.
    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. 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.
    14. 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, March.
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    18. Milgrom, Paul & Roberts, John, 1990. "Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities," Econometrica, Econometric Society, vol. 58(6), pages 1255-1277, November.
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    Citations

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    Cited by:

    1. Mark Armstrong & Steffen Huck, 2011. "Behavioral Economics as Applied to Firms: A Primer," Antitrust Chronicle, Competition Policy International, vol. 1.
    2. Roux, Catherine & Thöni, Christian, 2015. "Collusion among many firms: The disciplinary power of targeted punishment," Journal of Economic Behavior & Organization, Elsevier, pages 83-93.
    3. von Siemens, Ferdinand A., 2013. "Intention-based reciprocity and the hidden costs of control," Journal of Economic Behavior & Organization, Elsevier, vol. 92(C), pages 55-65.
    4. Ferdinand von Siemens, 2011. "Intention-Based Reciprocity and the Hidden Costs of Control," Tinbergen Institute Discussion Papers 11-115/1, Tinbergen Institute.
    5. Ferdinand von Siemens, 2011. "Intention-Based Reciprocity and the Hidden Costs of Control," CESifo Working Paper Series 3553, CESifo Group Munich.

    More about this item

    Keywords

    fairness; reciprocity; collusion; repeated games;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

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