Three is still a Party: An Experiment on Collusion and Entry

Abstract

This paper presents an experiment to test effects of sequential entry on stability of collusion in oligopoly markets. Previous research suggests that the larger the number of firms, the harder it is to sustain collusion. We find that when groups start off small and the entrant is informed about the history of her group, collusion is easier to sustain than in groups starting large. Implicit coordination problems may be easier resolved in smaller groups and coordination, once established, can be transferred to enlarged groups by means of common codes of conduct. The results also suggest that entrants emulate group behavior.

Keywords: Collusion, Entry, Experiments

JEL Classification: C72, C92, L13, L40