Optimal Collusion with Limited Severity Constraint

Etienne Billette de Villemeur, Laurent Flochel () and Bruno Versaevel ()
Additional contact information
Laurent Flochel: Charles River Associates International, 27 Avenue de l'Opéra, 75001 Paris, France
Bruno Versaevel: EMLYON Business School & CNRS, GATE, 69134 Ecully cedex France

No 909, Working Papers from Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon

Abstract: Collusion sustainability depends on firms' aptitude to impose suffciently 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.

Keywords: Collusion; Oligopoly; Penal codes (search for similar items in EconPapers)
JEL-codes: C72 D43 L13 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2009
New Economics Papers: this item is included in nep-bec, nep-com, nep-gth, nep-ind and nep-reg
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ftp://ftp.gate.cnrs.fr/RePEc/2009/0909.pdf (application/pdf)

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Working Paper: Optimal Collusion with Limited Severity Constraint (2009)
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