Robust Collusion with Private Information

David Miller

The Review of Economic Studies, 2012, vol. 79, issue 2, 778-811

Abstract: The game-theoretic literature on collusion has been hard pressed to explain why a cartel should engage in price wars, without resorting to either impatience, symmetry restrictions, inability to communicate, or failure to optimize. This paper introduces a new explanation that relies on none of these assumptions: if the cartel's member firms have private information about their costs, price wars can be optimal in the face of complexity. Specifically, equilibria that are robust to pay-off irrelevant disruptions of the information environment generically cannot attain or approximate efficiency. An optimal robust equilibrium must allocate market shares inefficiently and may call for price wars under certain conditions. For a two-firm cartel, cost interdependence is a sufficient condition for price wars to arise in an optimal robust equilibrium. That optimal equilibria are inefficient generically applies not only to collusion games but also to the entire separable pay-off environment--a class that includes most typical economic models. Copyright 2012, Oxford University Press.

Date: 2012
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