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Optimal Collusion under Cost Asymmetry

Author

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  • Miklos-Thal, Jeanine
Abstract
Cost asymmetry is generally thought to hinder collusion because a more efficient firm has both more to gain from a deviation and less to fear from retaliation than less efficient firms. Our paper reexamines this conventional wisdom and characterizes optimal collusion without any prior restriction on the class of strategies. We first stress that firms can credibly agree on retaliation schemes that maximally punish even the most efficient firm. This implies that whenever collusion is sustainable under cost symmetry, some collusion is also sustainable under cost asymmetry; efficient collusion, however, remains more di¢ cult to sustain when costs are asymmetric. Finally, we show that, in the presence of side payments, cost asymmetry generally facilitates collusion.

Suggested Citation

  • Miklos-Thal, Jeanine, 2008. "Optimal Collusion under Cost Asymmetry," MPRA Paper 11044, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:11044
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    References listed on IDEAS

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    More about this item

    Keywords

    horizontal collusion; cost asymmetry; optimal punishments; side payments;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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