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
Pages (from-to)827-844
JournalEconomic Theory
Volume68
Issue number4
DOIs
Publication statusPublished - Nov 2019

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Keywords

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

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