On Tacit versus Explicit Collusion

30 Pages Posted: 5 Nov 2014

See all articles by Yu Awaya

Yu Awaya

University of Rochester

Vijay Krishna

Penn State University

Date Written: November 3, 2014

Abstract

Antitrust law makes a sharp distinction between tacit and explicit collusion whereas the theory of repeated games -- the standard framework for studying collusion -- does not. In this paper, we study this difference in Stigler's (1964) model of secret price cutting. This is a repeated game with private monitoring since in the model, firms observe neither the prices nor the sales of their rivals. For a fixed discount factor, we identify conditions under which there are equilibria under explicit collusion that result in near-perfect collusion -- profits are close to those of a monopolist -- whereas all equilibria under tacit collusion are bounded away from this outcome. Thus, in our model, explicit collusion leads to higher prices and profits than tacit collusion.

Keywords: Collusion, communication, repeated games, private monitoring

JEL Classification: C73, D43

Suggested Citation

Awaya, Yu and Krishna, Vijay, On Tacit versus Explicit Collusion (November 3, 2014). Available at SSRN: https://ssrn.com/abstract=2518707 or http://dx.doi.org/10.2139/ssrn.2518707

Yu Awaya

University of Rochester ( email )

280 Hutchison Road
Rochester, NY 14627
United States

Vijay Krishna (Contact Author)

Penn State University ( email )

Kern 516
University Park, PA 16802-3306
United States
814-863-8543 (Phone)
814-863-4775 (Fax)

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