Collusion under Payoff Fluctuations

Abstract

Theoretical literature on collusion has focused on a specific formulation of payoff fluctuations, namely by demand shocks, and showed that payoff fluctuations are bad for collusion. Introducing general payoff fluctuations, we show that (i) payoff fluctuations may strictly reduce the minimum discount factor to sustain collusion and (ii) both mutual cooperation and defection can arise as the outcome of the best symmetric equilibrium. The former result implies that payoff fluctuations can facilitate collusion. The latter provides a rationale for the coexistence of cartels and price wars (as the reversion to noncooperative actions) in a single collusive behavior.

Keywords: collusion, fluctuations, price war, prisoner's dilemma, repeated game

JEL Classification: C73, D43, L13