Journal Article

Robust Collusion with Private Information

David A. Miller

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 79, issue 2, pages 778-811
Published in print April 2012 | ISSN: 0034-6527
Published online September 2011 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1093/restud/rdr035
Robust Collusion with Private Information

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  • Information, Knowledge, and Uncertainy
  • Game Theory and Bargaining Theory
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The game-theoretic literature on collusion has been hard pressed to explain why a cartel should engage in price wars, without resorting to either impatience, symmetry restrictions, inability to communicate, or failure to optimize. This paper introduces a new explanation that relies on none of these assumptions: if the cartel's member firms have private information about their costs, price wars can be optimal in the face of complexity. Specifically, equilibria that are robust to pay-off irrelevant disruptions of the information environment generically cannot attain or approximate efficiency. An optimal robust equilibrium must allocate market shares inefficiently and may call for price wars under certain conditions. For a two-firm cartel, cost interdependence is a sufficient condition for price wars to arise in an optimal robust equilibrium. That optimal equilibria are inefficient generically applies not only to collusion games but also to the entire separable pay-off environment—a class that includes most typical economic models.

Keywords: Collusion; Price wars; Private information; Repeated games; Mechanism design; Ex post incentive compatibility; C72; C73; D82; L13

Journal Article.  14082 words.  Illustrated.

Subjects: Information, Knowledge, and Uncertainy ; Game Theory and Bargaining Theory ; Market Structure, Firm Strategy, and Market Performance

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