How Demand Information Can Destabilize a Cartel

Liliane Giardino-Karlinger

Vienna Economics Papers from University of Vienna, Department of Economics

Abstract: This paper studies a symmetric Bertrand duopoly with imperfect monitoring where firms receive noisy public signals about the state of demand. These signals have two opposite effects on the incentive to collude: avoiding punishment after a low-demand period increases collusive profits, making collusion more attractive, but it also softens the threat of punishment, which increases the temptation to undercut the rival. There are cases where the latter effect dominates, and so the collusive equilibrium does not always exist when it does absent demand information. These findings are related to the Sugar Institute Case studied by Genesove and Mullin (2001).

JEL-codes: L13 L41 (search for similar items in EconPapers)
Date: 2008-02
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