Multimarket contact effect on collusion through diversification
This study establishes the potential positive relationship between multimarket contact (MMC) and sustainable collusive profits under demand fluctuations. In particular, I focus on the correlation structure between demand shocks over multiple markets and show how it can lead to a positive link between collusive profit and MMC. Simple theoretical models show that, regardless of whether demand shocks are observable or not, MMC may improve collusive profits through diversification of demand shocks over overlapping markets. If firms meet in multiple markets and link those markets in the sense that deviation in any market will trigger simultaneous retaliations in every market, then a cheating firm will optimally deviate in every market. Demand fluctuation that a firm is facing in its markets in total will be reduced as the number of markets increases, unless demand shocks are perfectly and positively correlated between the markets. The reduction of demand fluctuations can boost collusion (1) by reducing the temptation to deviate in the period of high demand when demand shocks are observable and (2) by reducing the frequency of costly punishment on the equilibrium path when demand shock is unobservable. The conclusion in the case of observable demand shock provides us with a new testable implication that price competition will be muted by MMC in periods of high demand.
|Date of creation:||Sep 2010|
|Contact details of provider:|| Postal: Schönberggasse 1, CH-8001 Zürich|
Phone: +41-1-634 21 37
Fax: +41-1-634 49 82
Web page: http://www.econ.uzh.ch/
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.:
- Hughes, Kirsty & Oughton, Christine, 1993. "Diversification, Multi-market Contact and Profitability," Economica, London School of Economics and Political Science, vol. 60(238), pages 203-224, May.
- Green, Edward J. & Porter, Robert H., 1982.
"Noncooperative Collusion Under Imperfect Price Information,"
367, California Institute of Technology, Division of the Humanities and Social Sciences.
- Green, Edward J & Porter, Robert H, 1984. "Noncooperative Collusion under Imperfect Price Information," Econometrica, Econometric Society, vol. 52(1), pages 87-100, January.
- Edward J Green & Robert H Porter, 1997. "Noncooperative Collusion Under Imperfect Price Information," Levine's Working Paper Archive 1147, David K. Levine.
- Thomas, Charles J. & Willig, Robert D., 2006. "The risk of contagion from multimarket contact," International Journal of Industrial Organization, Elsevier, vol. 24(6), pages 1157-1184, November.
- William N. Evans & Ioannis N. Kessides, 1994. "Living by the "Golden Rule": Multimarket Contact in the U. S. Airline Industry," The Quarterly Journal of Economics, Oxford University Press, vol. 109(2), pages 341-366.
- 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.
- Spagnolo, G., 1999.
"On Interdependent Supergames: Multimarket Contact, Concavity, and Collusion,"
Cambridge Working Papers in Economics
9914, Faculty of Economics, University of Cambridge.
- Spagnolo, Giancarlo, 1999. "On Interdependent Supergames: Multimarket Contact, Concavity, and Collusion," Journal of Economic Theory, Elsevier, vol. 89(1), pages 127-139, November.
- Fudenberg, Drew & Levine, David I & Maskin, Eric, 1994.
"The Folk Theorem with Imperfect Public Information,"
Econometric Society, vol. 62(5), pages 997-1039, September.
- Drew Fudenberg & David K. Levine & Eric Maskin, 1994. "The Folk Theorem with Imperfect Public Information," Levine's Working Paper Archive 394, David K. Levine.
- Drew Fudenberg & David K. Levine & Eric Maskin, 1994. "The Folk Theorem with Imperfect Public Information," Levine's Working Paper Archive 2058, David K. Levine.
- Fudenberg, D. & Levine, D.K. & Maskin, E., 1989. "The Folk Theorem With Inperfect Public Information," Working papers 523, Massachusetts Institute of Technology (MIT), Department of Economics.
- Switgard Feuerstein, 2005. "Collusion in Industrial Economics—A Survey," Journal of Industry, Competition and Trade, Springer, vol. 5(3), pages 163-198, December.
- Hitoshi Matsushima, 1998.
"Multimarket Contact, Imperfect Monitoring, and Implicit Collusion,"
CIRJE-F-24, CIRJE, Faculty of Economics, University of Tokyo.
- Matsushima, Hitoshi, 2001. "Multimarket Contact, Imperfect Monitoring, and Implicit Collusion," Journal of Economic Theory, Elsevier, vol. 98(1), pages 158-178, May.
When requesting a correction, please mention this item's handle: RePEc:zur:iewwpx:501. 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: (Marita Kieser)
If references are entirely missing, you can add them using this form.