Collusion, Firm Numbers and Asymmetries Revisited

Luke Garrod and Matthew Olczak
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Matthew Olczak: Aston Business School, Aston University, Birmingham

No 2016-11, Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) from Centre for Competition Policy, University of East Anglia, Norwich, UK.

Abstract: Despite the fact that competition law prohibits explicit cartels but not tacit collusion, theories of collusion often do not distinguish between the two. In this paper, we address this issue and ask: under which types of market structures are cartels likely to arise when firms can alternatively collude tacitly? To answer this question, we analyse an infinitely repeated game where firms with (possibly asymmetric) capacity constraints can make secret price cuts. Tacit collusion can involve price wars on the equilibrium path. Explicit collusion involves firms secretly sharing their private information in an illegal cartel to avoid such price wars. However, this runs the risk of sanctions. We find that, in contrast to the conventional wisdom but consistent with the available empirical evidence, cartels are least likely to arise in markets with a few symmetric firms, because tacit collusion is relatively more appealing in such markets. We discuss the implications for anti-cartel enforcement policy.

Keywords: cartel; tacit collusion; imperfect monitoring; capacity constraints (search for similar items in EconPapers)
JEL-codes: D43 D82 K21 L44 (search for similar items in EconPapers)
Date: 2016-09-30
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Working Paper: Collusion, Firm Numbers and Asymmetries Revisited (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:uea:ueaccp:2016_11

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Juliette Hardman, Center for Competition Policy, University of East Anglia, Norwich Research Park, Norwich, NR4 7TJ, UK

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