Profit-Sharing vs Price-Fixing Collusion with Heterogeneous Firms

Keisuke Hattori

MPRA Paper from University Library of Munich, Germany

Abstract: This paper compares the profitability and sustainability between profit-sharing collusion with side payments and price-fixing collusion without side payments in a two-firm repeated Bertrand game when firms differ in both cost and discount factor. Although profit-sharing collusion yields larger joint profits, bargaining over collusive agreements makes heterogeneous firms prefer different types of collusion: a low-cost (high cost) firm is more likely to adhere to profit-sharing (price-fixing) collusion. If both firms have the same discount factor, profit-sharing collusion is more sustainable. However, price-fixing collusion can be the only sustainable collusion if the efficient firm is more patient than the inefficient firm. Furthermore, we extend profit-sharing collusion by incorporating side payments with different enforcement procedures (i.e., different timing of side payments) and different purposes: to reach agreement and to make the agreement sustainable. Our results provide a theoretical rationale for why firms fail or succeed at reaching and sustaining some forms of collusion.

Keywords: Collusion; Asymmetric costs; Asymmetric discount factors; Side payments; Repeated game (search for similar items in EconPapers)
JEL-codes: C73 C78 L13 L41 (search for similar items in EconPapers)
Date: 2021-11-23
New Economics Papers: this item is included in nep-bec, nep-com, nep-gth, nep-ind, nep-mic, nep-ore and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:110800

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