Cheating and compensation in price-fixing cartels

Jihwan Do

doi:10.1016/j.jet.2021.105382

Cheating and compensation in price-fixing cartels

Jihwan Do

Department of Economics

Research output: Contribution to journal › Article › peer-review

1 Citation (Scopus)

Abstract

This paper provides a theoretical explanation of “cheating and compensation on-path of play” using a canonical repeated game model of price-fixing collusion. The novel mechanism relies on firms playing mixed strategies allowing for both the monopoly price and undercutting the monopoly price to happen with positive probability, together with a compensation scheme that punishes a price-cutter. For an intermediate range of discount factors, the mechanism is optimal in a restricted class of equilibria, and such price-cutting and compensation are necessary parts for any symmetric collusive equilibrium.

Original language	English
Article number	105382
Journal	Journal of Economic Theory
Volume	200
DOIs	https://doi.org/10.1016/j.jet.2021.105382
Publication status	Published - 2022 Mar

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© 2021 Elsevier Inc.

All Science Journal Classification (ASJC) codes

Economics and Econometrics

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10.1016/j.jet.2021.105382

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title = "Cheating and compensation in price-fixing cartels",

abstract = "This paper provides a theoretical explanation of “cheating and compensation on-path of play” using a canonical repeated game model of price-fixing collusion. The novel mechanism relies on firms playing mixed strategies allowing for both the monopoly price and undercutting the monopoly price to happen with positive probability, together with a compensation scheme that punishes a price-cutter. For an intermediate range of discount factors, the mechanism is optimal in a restricted class of equilibria, and such price-cutting and compensation are necessary parts for any symmetric collusive equilibrium.",

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AB - This paper provides a theoretical explanation of “cheating and compensation on-path of play” using a canonical repeated game model of price-fixing collusion. The novel mechanism relies on firms playing mixed strategies allowing for both the monopoly price and undercutting the monopoly price to happen with positive probability, together with a compensation scheme that punishes a price-cutter. For an intermediate range of discount factors, the mechanism is optimal in a restricted class of equilibria, and such price-cutting and compensation are necessary parts for any symmetric collusive equilibrium.

KW - Collusion

KW - Compensation scheme

KW - Oligopoly

KW - Price-cutting

KW - Repeated game

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ER -

Cheating and compensation in price-fixing cartels

Abstract

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