Cheating and compensation in price-fixing cartels

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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 languageEnglish
Article number105382
JournalJournal of Economic Theory
Volume200
DOIs
Publication statusPublished - 2022 Mar

Bibliographical note

Publisher Copyright:
© 2021 Elsevier Inc.

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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