Repeated Games with Correlated Private Monitoring and Secret Price Cuts

Hitoshi Matsushima

No CIRJE-F-154, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: This paper investigates general two-player infinitely repeated games where the discount factor is less than but close to unity. We assume that monitoring is imperfect and private, and players' private signals are correlated through the unobservable macro shock. We show that a sequential equilibrium payoff vector approximates efficiency in a wide class of environments when the size of the set of private signals for each player is sufficiently large in comparison with the size of the set of possible macro shocks as well as the size of the set of actions for the opponent. We require almost no condition on the accuracy of players' monitoring technology. We argue that the use of review strategy works very well in the private monitoring case, although it does not work well in the public monitoring case. We apply our efficiency result to a model of price-setting duopoly a la Stigler (1964), where each firm's price choice is unobservable to its rival firm and the sales level for each firm is regarded as its private signal. Contrarily to Stigler's conjecture, the full cartel collusion can be self-enforcing even if firms cannot communicate and have the option of making secret price cuts.

Pages: 38 pages
Date: 2002-06
New Economics Papers: this item is included in nep-gth
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