Collusion, Firm Numbers and Asymmetries Revisited

Luke Garrod and Matthew Olczak

MPRA Paper from University Library of Munich, Germany

Abstract: Despite the fact that competition law prohibits explicit cartels but not tacit collusion, theories of collusion often do not distinguish between the two. In this paper, we address this issue and ask: under which types of market structures are cartels likely to arise when firms can alternatively collude tacitly? To answer this question, we analyse an infinitely repeated game where firms with (possibly asymmetric) capacity constraints can make secret price cuts. Tacit collusion can involve price wars on the equilibrium path. Explicit collusion involves firms secretly sharing their private information in an illegal cartel to avoid such price wars. However, this runs the risk of sanctions. We find that, in contrast to the conventional wisdom but consistent with the available empirical evidence, cartels are least likely to arise in markets with a few symmetric firms, because tacit collusion is relatively more appealing in such markets. We discuss the implications for anti-cartel enforcement policy.

Keywords: cartel; tacit collusion; imperfect monitoring; capacity constraints (search for similar items in EconPapers)
JEL-codes: D43 D82 K21 L44 (search for similar items in EconPapers)
Date: 2016-09-30
New Economics Papers: this item is included in nep-com, nep-ind and nep-law
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:74352

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