Frequency of interaction, communication and collusion

An experiment

Maria Bigoni, Jan Potters, Giancarlo Spagnolo

Research output: Contribution to journalArticleScientificpeer-review

Abstract

The frequency of interaction facilitates collusion by reducing gains from defection. Theory has shown that under imperfect monitoring flexibility may hinder cooperation by inducing punishment after too few noisy signals, making collusion impossible in many environments (Sannikov and Skrzypacz in Am Econ Rev 97:1794–1823, 2007). The interplay of these forces should generate an inverse U-shaped effect of flexibility on collusion. We test for the first time these theoretical predictions—central to antitrust policy—in a laboratory experiment featuring an indefinitely repeated Cournot duopoly, with different degrees of flexibility. Results turn out to depend crucially on whether subjects can communicate with each other at the beginning of a supergame (explicit collusion) or not (tacit collusion). Without communication, the incidence of collusion is low throughout and not significantly related to flexibility; when subjects are allowed to communicate, collusion is more common throughout and significantly more frequent in the treatment with intermediate flexibility than in the treatments with low or high flexibility.
Original languageEnglish
JournalEconomic Theory
DOIs
Publication statusE-pub ahead of print - Sep 2018

Fingerprint

Communication
Experiment
Collusion
Interaction
Imperfect monitoring
Punishment
Cournot duopoly
Tacit collusion
Supergame
Laboratory experiments

Keywords

  • cartels
  • Cournot oligopoly
  • flexibility
  • imperfect monitoring
  • repeated games

Cite this

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title = "Frequency of interaction, communication and collusion: An experiment",
abstract = "The frequency of interaction facilitates collusion by reducing gains from defection. Theory has shown that under imperfect monitoring flexibility may hinder cooperation by inducing punishment after too few noisy signals, making collusion impossible in many environments (Sannikov and Skrzypacz in Am Econ Rev 97:1794–1823, 2007). The interplay of these forces should generate an inverse U-shaped effect of flexibility on collusion. We test for the first time these theoretical predictions—central to antitrust policy—in a laboratory experiment featuring an indefinitely repeated Cournot duopoly, with different degrees of flexibility. Results turn out to depend crucially on whether subjects can communicate with each other at the beginning of a supergame (explicit collusion) or not (tacit collusion). Without communication, the incidence of collusion is low throughout and not significantly related to flexibility; when subjects are allowed to communicate, collusion is more common throughout and significantly more frequent in the treatment with intermediate flexibility than in the treatments with low or high flexibility.",
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Frequency of interaction, communication and collusion : An experiment. / Bigoni, Maria; Potters, Jan; Spagnolo, Giancarlo.

In: Economic Theory, 09.2018.

Research output: Contribution to journalArticleScientificpeer-review

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T1 - Frequency of interaction, communication and collusion

T2 - An experiment

AU - Bigoni, Maria

AU - Potters, Jan

AU - Spagnolo, Giancarlo

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AB - The frequency of interaction facilitates collusion by reducing gains from defection. Theory has shown that under imperfect monitoring flexibility may hinder cooperation by inducing punishment after too few noisy signals, making collusion impossible in many environments (Sannikov and Skrzypacz in Am Econ Rev 97:1794–1823, 2007). The interplay of these forces should generate an inverse U-shaped effect of flexibility on collusion. We test for the first time these theoretical predictions—central to antitrust policy—in a laboratory experiment featuring an indefinitely repeated Cournot duopoly, with different degrees of flexibility. Results turn out to depend crucially on whether subjects can communicate with each other at the beginning of a supergame (explicit collusion) or not (tacit collusion). Without communication, the incidence of collusion is low throughout and not significantly related to flexibility; when subjects are allowed to communicate, collusion is more common throughout and significantly more frequent in the treatment with intermediate flexibility than in the treatments with low or high flexibility.

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KW - Cournot oligopoly

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KW - repeated games

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