Optimal Collusion with Limited Liability and Policy Implications
Collusion sustainability depends on firms’ aptitude to impose sufficiently severe punishments in case of deviation from the collusive rule. We characterize the ability of oligopolistic firms to implement a collusive strategy when their ability to punish deviations over one or several periods is limited by a severity constraint. It captures all situations in which either structural conditions (the form of payoff functions), institutional circumstances (a regulation), or financial considerations (profitability requirements) set a lower bound to firms’ losses. The model specifications encompass the structural assumptions (A1-A3) in Abreu (1986) [Journal of Economic Theory, 39, 191-225]. The optimal punishment scheme is characterized, and the expression of the lowest discount factor for which collusion can be sustained is computed, that both depend on the status of the severity constraint. This extends received results from the literature to a large class of models that include a severity constraint, and uncovers the role of structural parameters that facilitate collusion by relaxing the constraint.
|Date of creation:||Mar 2009|
|Date of revision:||Jul 2011|
|Contact details of provider:|| Phone: (+33) 5 61 12 86 23|
Web page: http://www.tse-fr.eu/
More information through EDIRC
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.:
- Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
- Andrew Eckert, 2002. "Retail price cycles and response asymmetry," Canadian Journal of Economics, Canadian Economics Association, vol. 35(1), pages 52-77, February.
- James W. Friedman, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Oxford University Press, vol. 38(1), pages 1-12.
- Jeanine Thal, 2005.
"Optimal Collusion under Cost Asymmetry,"
2005-36, Centre de Recherche en Economie et Statistique.
- Malcolm Baker & Jeremy C. Stein & Jeffrey Wurgler, 2003.
"When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 118(3), pages 969-1005.
- Malcolm Baker & Jeremy C. Stein & Jeffrey Wurgler, 2002. "When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms," NBER Working Papers 8750, National Bureau of Economic Research, Inc.
- Malcolm Baker & Jeremy C. Stein & Jeffrey Wurgler, 2002. "When Does the Market Matter? Stock Prices and the Investsment of Equity-Dependent Firms," Harvard Institute of Economic Research Working Papers 1978, Harvard - Institute of Economic Research.
- Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June.
- Helder Vasconcelos, 2005. "Tacit Collusion, Cost Asymmetries, and Mergers," RAND Journal of Economics, The RAND Corporation, vol. 36(1), pages 39-62, Spring.
- Lambson Val Eugene, 1994. "Some Results on Optimal Penal Codes in Asymmetric Bertrand Supergames," Journal of Economic Theory, Elsevier, vol. 62(2), pages 444-468, April.
- Corchón, Luis C. & Yasuda, Yosuke & Beviá, Carmen, 2011.
"Oligopolistic equilibrium and financial constraints,"
UC3M Working papers. Economics
we1110, Universidad Carlos III de Madrid. Departamento de Economía.
- Carmen Beviá & Luis C. Corchón & and Yosuke, 2011. "Oligopolistic Equilibrium and Financial Constraints," Working Papers 547, Barcelona Graduate School of Economics.
- Beviá, Carmen & Corchón, Luis C. & Yasuda, Yosuke, 2015. "Oligopolistic Equilibrium and Financial Constraints," Economics Series 316, Institute for Advanced Studies.
- Motta,Massimo, 2004. "Competition Policy," Cambridge Books, Cambridge University Press, number 9780521016919, November.
- Rothschild, R., 1999. "Cartel stability when costs are heterogeneous," International Journal of Industrial Organization, Elsevier, vol. 17(5), pages 717-734, July.
- Chang, Myong-Hun, 1991. "The effects of product differentiation on collusive pricing," International Journal of Industrial Organization, Elsevier, vol. 9(3), pages 453-469, September.
- George Symeonidis, 2003. "In Which Industries is Collusion More Likely? Evidence from the UK," Journal of Industrial Economics, Wiley Blackwell, vol. 51(1), pages 45-74, 03.
- Robert Gagné & Simon van Norden & Bruno Versaevel, 2003.
"Testing Optimal Punishment Mechanisms Under Price Regulation: the Case of the Retail Market for Gasoline,"
CIRANO Working Papers
- Robert Gagné & Simon van Norden & Bruno Versaevel, 2006. "Testing Optimal Punishment Mechanisms under Price Regulation: the Case of the Retail Market for Gasoline," Working Papers 0611, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
- Robert Gagné & Simon van Norden & Bruno Versaevel, 2006. "Testing Optimal Punishment Mechanisms under Price Regulation: the Case of the Retail Market for Gasoline," Cahiers de recherche 06-12, HEC Montréal, Institut d'économie appliquée.
- Robert Gagné & Simon Van Norden & Bruno Versaevel, 2006. "Testing Optimal Punishment Mechanisms under Price Regulation: the Case of the Retail Market for Gasoline," Post-Print halshs-00142516, HAL.
- Eckert, Andrew & West, Douglas S, 2004. "Retail Gasoline Price Cycles across Spatially Dispersed Gasoline Stations," Journal of Law and Economics, University of Chicago Press, vol. 47(1), pages 245-73, April.
- Motta,Massimo, 2004. "Competition Policy," Cambridge Books, Cambridge University Press, number 9780521816632, November.
- Val Eugene Lambson, 1987. "Optimal Penal Codes in Price-setting Supergames with Capacity Constraints," Review of Economic Studies, Oxford University Press, vol. 54(3), pages 385-397.
- Compte, Olivier & Jenny, Frederic & Rey, Patrick, 2002. "Capacity constraints, mergers and collusion," European Economic Review, Elsevier, vol. 46(1), pages 1-29, January.
- Margaret C. Levenstein & Valerie Y. Suslow, 2002. "What Determines Cartel Success?," UMASS Amherst Economics Working Papers 2002-01, University of Massachusetts Amherst, Department of Economics.
When requesting a correction, please mention this item's handle: RePEc:tse:wpaper:21939. 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: ()
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.