Oligopoly as a Socially Embedded Dilemma: An Experiment

42 Pages Posted: 31 Jan 2011 Last revised: 11 Nov 2011

See all articles by Christoph Engel

Christoph Engel

Max Planck Institute for Research on Collective Goods; University of Bonn - Faculty of Law & Economics; Erasmus University Rotterdam (EUR), Erasmus School of Law, Rotterdam Institute of Law and Economics, Students; Universität Osnabrück - Faculty of Law

Lilia Wasserka-Zhurakhovska

University of Duisburg-Essen - Mercator School of Management; Max Planck Institute for Research on Collective Goods

Date Written: November 2011

Abstract

From the perspective of competitors, competition may be modeled as a prisoner’s dilemma. Setting the monopoly price is cooperation, undercutting is defection. Jointly, competitors are better off if both are faithful to a cartel. Individually, profit is highest if only the competitor(s) is (are) loyal to the cartel. Yet collusion inflicts harm on the opposite market side and, through the deadweight loss, on society at large. Moreover, almost all legal orders combat cartels. Through the threat with antitrust intervention, gains from cooperation are uncertain. In the field, both qualifications combine. To prevent participants from using their world knowledge about antitrust, we experimentally test them on a neutral matrix game, with either a negative externality on a third participant, uncertainty about gains from cooperation, or both. Uncertainty dampens cooperation, though only slightly. Surprisingly, externalities are immaterial. If we control for beliefs, they even foster cooperation. If we combine both qualifications and do not control for beliefs, we only find an uncertainty effect. If we add beliefs as a control variable, we only find that externalities enhance cooperation, even if gains from collusion are uncertain. Hence the fact that the dilemma of oligopolists is socially embedded matters less than one might have expected.

Keywords: oligopoly, collusion, negative externalities, uncertainty, prisoner’s dilemma, experiment

JEL Classification: C72, C91, D03, D22, D43, D62, D81, H23, K21, K42, L13, L41

Suggested Citation

Engel, Christoph and Wasserka-Zhurakhovska, Lilia, Oligopoly as a Socially Embedded Dilemma: An Experiment (November 2011). MPI Collective Goods Preprint, No. 2011/1, Available at SSRN: https://ssrn.com/abstract=1750094 or http://dx.doi.org/10.2139/ssrn.1750094

Christoph Engel (Contact Author)

Max Planck Institute for Research on Collective Goods ( email )

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University of Bonn - Faculty of Law & Economics

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Erasmus University Rotterdam (EUR), Erasmus School of Law, Rotterdam Institute of Law and Economics, Students ( email )

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Universität Osnabrück - Faculty of Law

Osnabruck, D-49069
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Lilia Wasserka-Zhurakhovska

University of Duisburg-Essen - Mercator School of Management ( email )

Lotharstraße 65
Duisburg, Nordrhein-Westfalen 47057
Germany

Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
Bonn, 53113
Germany

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