Cheating and compensation in price-fixing cartels

Jihwan Do

Journal of Economic Theory, 2022, vol. 200, issue C

Abstract: This paper provides a theoretical explanation of “cheating and compensation on-path of play” using a canonical repeated game model of price-fixing collusion. The novel mechanism relies on firms playing mixed strategies allowing for both the monopoly price and undercutting the monopoly price to happen with positive probability, together with a compensation scheme that punishes a price-cutter. For an intermediate range of discount factors, the mechanism is optimal in a restricted class of equilibria, and such price-cutting and compensation are necessary parts for any symmetric collusive equilibrium.

Keywords: Collusion; Oligopoly; Repeated game; Price-cutting; Compensation scheme (search for similar items in EconPapers)
JEL-codes: D43 K21 L12 L13 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:200:y:2022:i:c:s002205312100199x

DOI: 10.1016/j.jet.2021.105382

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