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Explicit vs tacit collusion: The effects of firm numbers and asymmetries

Luke Garrod and Matthew Olczak

International Journal of Industrial Organization, 2018, vol. 56, issue C, 1-25

Abstract: In an infinitely repeated game where firms with (possibly asymmetric) capacity constraints can make secret price cuts, we analyse the incentives for explicit collusion when firms can alternatively collude tacitly. Tacit collusion can involve price wars on the equilibrium path. Explicit collusion involves firms secretly sharing their private information to avoid such price wars, but this is illegal and runs the risk of sanctions. We find that, in contrast to the conventional wisdom but consistent with some empirical evidence, illegal 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: Cartels; 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: 2018
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International Journal of Industrial Organization is currently edited by P. Bajari, B. Caillaud and N. Gandal

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Handle: RePEc:eee:indorg:v:56:y:2018:i:c:p:1-25