Oligopoly as a Socially Embedded Dilemma. An Experiment

Christoph Engel and Lilia Zhurakhovska ()
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Lilia Zhurakhovska: Max Planck Institute for Research on Collective Goods, Bonn

No 2011_01, Discussion Paper Series of the Max Planck Institute for Research on Collective Goods from Max Planck Institute for Research on Collective Goods

Abstract: From the perspective of competitors, competition may be modeled as a prisoner’s dilemma. Setting the monopoly price is cooperation, undercutting is defection. Jointly, competitors are better off if both are faithful to a cartel. Individually, profit is highest if only the competitor(s) is (are) loyal to the cartel. Yet collusion inflicts harm on the opposite market side and, through the deadweight loss, on society at large. Moreover, almost all legal orders combat cartels. Through the threat with antitrust intervention, gains from cooperation are uncertain. In the field, both qualifications combine. To prevent participants from using their world knowledge about antitrust, we experimentally test them on a neutral matrix game, with either a negative externality on a third participant, uncertainty about gains from cooperation, or both. Uncertainty dampens cooperation, though only slightly. Surprisingly, externalities are immaterial. If we control for beliefs, they even foster cooperation. If we combine both qualifications and do not control for beliefs, we only find an uncertainty effect. If we add beliefs as a control variable, we only find that externalities enhance cooperation, even if gains from collusion are uncertain. Hence the fact that the dilemma of oligopolists is socially embedded matters less than one might have expected.

Keywords: Oligopoly; Collusion; experiment; Uncertainty; negative externalities; prisoner’s dilemma (search for similar items in EconPapers)
JEL-codes: C72 C91 D03 D22 D43 D62 D81 H23 K21 K42 L13 L41 (search for similar items in EconPapers)
Date: 2011-01
New Economics Papers: this item is included in nep-exp and nep-ind
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