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Impossibility of Collusion under Imperfect Monitoring with Flexible Production

Yuliy Sannikov and Andrzej Skrzypacz

No 418, 2004 Meeting Papers from Society for Economic Dynamics

Abstract: We show that it is impossible to achieve collusion in a duopoly when (1) the prices depend only on the sum of the firms' supplies (2) firms are able to respond to new information quickly and (3) the likelihood ratio for detection of each deviation is a continuous process (so that new information does not arrive in jumps.) We prove this result in a discrete-time setting where prices are stationary normal random variables whose mean depends on the sum of produced quantities and the variance is inversely proportional to time interval over which the quantities are fixed. The length of this interval represents the flexibility of production. In this setting, we show that when the production is sufficiently flexible, so that firms can move sufficiently frequently, it is not possible to sustain payoffs better than in a static Nash equilibrium. This result is valid even when we allow asymmetric public perfect equilibria with the possibility of monetary transfers. We also discuss effects of product differentiation.

Keywords: repated games; imperfect monitoring; collusion (search for similar items in EconPapers)
JEL-codes: C7 (search for similar items in EconPapers)
Date: 2004
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Journal Article: Impossibility of Collusion under Imperfect Monitoring with Flexible Production (2007) Downloads
Working Paper: Impossibility of Collusion under Imperfect Monitoring with Flexible Production (2005) Downloads
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