Multimarket Contact Under Imperfect Monitoring

Abstract

It is well known that the presence of imperfect monitoring limits the possibility of making efficient agreements. When firms interact repeatedly in multiple markets, however, we show that noisy observations may improve the possibility of collusion. When observation is noisy in at least one market, we find a novel spillover effect that enhances firms' ability to sustain collusive outcomes. Moreover, this spillover effect is present even if firms and markets are identical, and collusion cannot be sustained in any single market; this stands in contrast to a key finding of Bernheim and Whinston (1990). This result suggests that multimarket contact can be more harmful to competition in markets in which there is only noisy observations about rivals' actions. Our finding agrees with empirical studies and has policy implications for multimarket contact.

Keywords: multimarket contact, collusion, imperfect monitoring, symmetric markets, repeated games

JEL Classification: C73, D21, D43, L13, L41