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.
|Journal||Journal of Economic Theory|
|Publication status||Published - 2022 Mar|
Bibliographical noteFunding Information:
I am grateful to Paulo Barelli, Jeanine Miklós-Thal, Srihari Govindan, and Yu Awaya for their invaluable advice and encouragements. I would also like to thank Asen Kochov, William Thomson, Michael Raith, Sung-Ha Hwang, and all seminar participants at the ESWM 2020 conference in Nottingham and the University of Rochester. Finally, I appreciate editor Xavier Vives and two anonymous referees for their insightful and detailed comments. This paper is a revised version of Chapter 1 of Do's PhD dissertation. I declare that there is no conflict of interest. This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.
© 2021 Elsevier Inc.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics