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Price Cutting and Business Stealing in Imperfect Cartels

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  • B. Douglas Bernheim
  • Erik Madsen

Abstract

Although economists have made substantial progress toward formulating theories of collusion in industrial cartels that account for a variety of fact patterns, important puzzles remain. Standard models of repeated interaction formalize the observation that cartels keep participants in line through the threat of punishment, but they fail to explain two important factual observations: first, apparently deliberate cheating actually occurs; second, it frequently goes unpunished even when it is detected. We propose a theory of equilibrium price cutting and business stealing in cartels to bridge this gap between theory and observation.

Suggested Citation

  • B. Douglas Bernheim & Erik Madsen, 2017. "Price Cutting and Business Stealing in Imperfect Cartels," American Economic Review, American Economic Association, vol. 107(2), pages 387-424, February.
  • Handle: RePEc:aea:aecrev:v:107:y:2017:i:2:p:387-424
    Note: DOI: 10.1257/aer.20140359
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    Cited by:

    1. David K. Levine & Andrea Mattozzi & Salvatore Modica, 2021. "Trade Associations: Why Not Cartels?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(1), pages 47-64, February.
    2. Julio B. Clempner & Alexander S. Poznyak, 2021. "Analytical Method for Mechanism Design in Partially Observable Markov Games," Mathematics, MDPI, vol. 9(4), pages 1-15, February.
    3. Arevik Gnutzmann-Mkrtchyan & Hoffstadt, 2020. "Use and Abuse of Antidumping by Global Cartels," CESifo Working Paper Series 8729, CESifo.
    4. Bayona, Anna & López, Ángel L. & Manganelli, Anton-Giulio, 2022. "Common ownership, corporate control and price competition," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 1066-1075.
    5. Escobar, Juan F. & Llanes, Gastón, 2018. "Cooperation dynamics in repeated games of adverse selection," Journal of Economic Theory, Elsevier, vol. 176(C), pages 408-443.
    6. Suehyun Kwon, 2019. "Informed-Principal Problem in Mechanisms with Limited Commitment," CESifo Working Paper Series 7513, CESifo.
    7. Do, Jihwan, 2022. "Cheating and compensation in price-fixing cartels," Journal of Economic Theory, Elsevier, vol. 200(C).
    8. Calzolari, Giacomo & Calvano, Emilio & Denicolo, Vincenzo & Pastorello, Sergio, 2021. "Algorithmic collusion with imperfect monitoring," CEPR Discussion Papers 15738, C.E.P.R. Discussion Papers.
    9. Calvano, Emilio & Calzolari, Giacomo & Denicoló, Vincenzo & Pastorello, Sergio, 2021. "Algorithmic collusion with imperfect monitoring," International Journal of Industrial Organization, Elsevier, vol. 79(C).

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    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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